Introduching to Forex Trading (General Knowledge : Part 1)
Description of the Forex
Founded in 971, the Forex market was created, when the floating exchange rate started to be implemented. Forex market is not centralized, like currency futures or stock markets. Thousands of locations around the world are trading on computers and telephones. It is the world's largest financial market. In comparison, the US stock market can trade up to $ 10 billion a day, while the foreign exchange market trades up to $ 2 trillion a day. The forex market is an open 24-hour market where the primary market for currency is 24-hour interbank market. This market follows the sun all over the world, from major banking centers in the United States to Australia and New Zealand, to Europe, and finally to the United States. So far, professional businessmen of the main international commercial and investment banks dominated the FX market. Other market participants include private multimedia corporations, global financial directors, registered vendors, international money brokers and private satellites among alternative traders. Also enter the FX market against the unexpected exposure of the future price movement in currency markets in the currency market and money managers of the currency. Due to the FX market being operated between telecom or electronic networks, it is considered in the counter (otc) or 'interbank' market. An exchange of trading with stock and futures markets is not centralized. Forex trading starts in the real 24-hour market, Sydney, and for the first time in Tokyo, London and New York every financial center has started business days and has come around the world.
History of the Forex
Money, in one form or another, has been used by man for centuries. At first it was mainly Gold or Silver coins. Goods were traded against other goods or against gold. So, the price of gold became a reference point. But as the trading of goods grew between nations, moving quantities of gold around places to settle payments of trade became cumbersome, risky and time consuming. Therefore, a system was sought by which the payment of trades could be settled in the seller’s local currency. But how much of buyer’s local currency should be equal to the seller’s local currency?
The answer was simple. The strength of a country’s currency depended on the amount of gold reserves the country maintained. So, if country A’s gold reserves are double the gold reserves of country B, country A’s currency will be twice in value when exchanged with the currency of country B. This became to be known as The Gold Standard. Around 1880, The Gold Standard was accepted and used worldwide.
During the first WORLD WAR, in order to fulfill the enormous financing needs, paper money was created in quantities that far exceeded the gold reserves. The currencies lost their standard parities and caused a gross distortion in the country’s standing in terms of its foreign liabilities and assets.
After the end of the second WORLD WAR the western allied powers attempted to solve the problem at the Bretton Woods Conference in New Hampshire in 1944. In the first three weeks of July 1944, delegates from 45 nations gathered at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. The delegates met to discuss the postwar recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and protectionist trade policies.
During the 1930s, many of the world’s major economies had unstable currency exchange rates. As well, many nations used restrictive trade policies. In the early 1940s, the United States and Great Britain developed proposals for the creation of new international financial institutions that would stabilize exchange rates and boost international trade. There was also a recognized need to organize a recovery of Europe in the hopes of avoiding the problems that arose after the First World War. The delegates at Bretton Woods reached an agreement known as the Bretton Woods Agreement to establish a postwar international monetary system of convertible currencies, fixed exchange rates and free trade. To facilitate these objectives, the agreement created two international institutions: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). The intention was to provide economic aid for reconstruction of postwar Europe. An initial loan of $250 million to France in 1947 was the World Bank’s first act. Under the Bretton Woods Exchange System, the currencies of participating nations could be converted into the US dollar at a fixed rate, and foreign central banks could convert the US dollar into gold at a fixed rate. In other words, the US dollar replaced the then dominant British Pound and the parities of the world’s leading currencies were pegged against the US Dollar.
The Bretton Woods Agreement was also aimed at preventing currency competition and promoting monetary co-operation among nations. Under the Bretton Woods system, the IMF member countries agreed to a system of exchange rates that could be adjusted within defined parities with the US dollar or, with the agreement of the IMF, changed to correct a fundamental disequilibrium in the balance of payments. The per value system remained in use from 1946 until the early 1970s. The United States, under President Nixon, retaliated in 1971 by devaluing the dollar and forcing realignment of currencies with the dollar. The leading European economies tried to counter the US move by aligning their currencies in narrow band and then float collectively against the US dollar. The idea was to determine the value of a particular currency based on the demand and supply of the currency and the market for the economic health of the market. This market is popularly known as the international currency market or IMM. This IMM is not a single entity. It is a collection of all financial institutions that have no interest in foreign currencies worldwide. Banks, brokerage, fund managers, government central banks, and sometimes people have some examples.These foreign currency exchanges are very current, although the price of the currency is dependent on market forces, the central bank still tries to keep their currency in their predefined (and highly confidential) unstable band. They complete this by taking one or more different steps.
The Bretton Woods Agreement was originally planned that the international trade organization was initially conceived - the US Congress would not approve it. Instead, it was created in 1947, in the form of the General Agreement for Tariffs and Trade, which is signed in 23 states, including the United States and Canada. GATT later became known as the World Trade Organization. In recent years, the World Bank and the International Monetary Fund (IMF) in Bretton Woods have made a big challenge to help lenders return to the stable financial position of the two international institutions.
The Euromarket
A major catalyst to the acceleration of Forex trading was the rapid development of the Eurodollar market; where US dollars are deposited in banks outside the US Similarly, Euromarkets are those assets The Eurodollar market first came into being in the 1950s when Russia's oil revenue - all in dollars - was deposited outside the US in fear of being frozen by US regulators. That has given rise to a vast offshore pool of US officials. The US government imposed laws Euromarkets were particularly attractive because they were far less regulations and offered higher yields. From the late 1980s, American companies began to borrow offshore, finding Euromarkets a beneficial center for holding excess liquidity, providing short-term loans and financing imports and exports. London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks started loaning as an alternative to pounds in order to maintain their leading position in global finance. London's convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euromarket.
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