What is Forex?
One of the questions we get asked all the time is “What is forex trading?” When did it start? How big is it? Who are the major players? What makes currency rates change?
Answers to all your questions!
About Forex
Forex is the international market for the free trading of currencies. Traders place orders to buy one currency with another currency. For example, a trader may want to buy Euros with US dollars and he uses the Forex Market to do this.
The Forex Market is the world's largest financial market. Over $4 trillion dollars worth of currencies are traded each day. The amount of money traded in a week is bigger than the entire annual GDP of the United States! The main currency used for forex trading is the US dollar.
When did forex start?
During the Second World War, almost every country in the world suffered debilitating economic and finance woes and there was an urgent need for financial stability. Preparing to rebuild the entire international economic system while WWII was still raging, 44 Allied Nations gathered at Bretton Woods, New Hampshire, United States to chart out a new international economic system, where amongst other matters on its agenda, exchange rates would be fixed.
The International Monetary Fund (IMF) was also established under the Bretton Woods Agreement, and its operations commenced in 1949. All exchange rates changes above 1% had to be approved by the IMF, which had the direct effect of freezing these rates.
By the late 1960's the fixed currency exchange rate system started to break down, due to a number of international political and economic factors. In 1971, the then President of the United States, Richard Nixon, took a series of economic measures to safeguard the economic interest of United States, including unilaterally canceling the direct convertibility of the United States dollar to gold. This was known as the Nixon Shock.
It helped end the existing Bretton Woods System of international financial exchange, ushering in a new era of freely floating currencies. By 1976 all major currencies had floating exchange rates and it remains to the present day.
With floating rates, currencies could be traded freely, and price changes were based on market forces.
Thus, the modern Forex Market was born.
Who trades on the forex market?
There are many different players in the forex market. Some trade to make profits, others trade to hedge their risks and others simply need foreign currencies to pay for goods and services.
Participants include the following:
- Government central banks
- Commercial banks
- Investment banks
- Brokers and dealers
- Pension funds
- Insurance companies
- International corporations
- Individuals
When is the forex market open?
Unlike international Stock Exchanges, which have limited opening hours, the Forex Market is open 24 hours a day, five days a week. Banks need to buy and sell currencies round the clock, and the Forex Market has to be opened for them to do this.
What factors influence currency exchange rates?
As with any markets, the Forex Market is driven by supply and demand:
- If buyers exceed sellers, prices go up
- If sellers outnumber buyers, prices go down
The following factors can influence exchange rates:
- National economic performance
- Central bank policy
- Interest rates
- Trade balances – imports and exports
- Political factors – such as elections and policy changes
- Market sentiment – expectations and rumours
- Unforeseen events – terrorism and natural disasters
Despite all these factors, the global Forex Market is much more stable than stock markets because exchange rates change slowly and by small amounts over a period of time.
What are the advantages of the forex market?
The Forex Market has many advantages. These include the following:
- It's already the world's largest market and it's still growing
- It makes extensive use of information technology, making it available to everyone
- Traders can profit from both strong and weak economies
- Traders can place very short-term orders – which are prohibited in some other markets
- The market is not regulated
- Brokerage commissions are very low or non-existent
- The market is open 24 hours a day during weekdays
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