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?
Here are the answers to all your questions!
Forex is the international market for the free trade 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 will use the forex market to do this.
The forex market is the world’s largest financial market. Over $4 trillion dollars worth of currency 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.
As the world continued to tear itself apart in the Second World War, there was an urgent need for financial stability. International negotiators from 29 countries met in Bretton Woods and agreed to a new economic system where, amongst other things, exchange rates would be fixed.
The International Monetary Fund (IMF) was established under the Bretton Woods agreement, and started to operate in 1949. All exchange rates changes above 1% had to be approved by the IMF, which had the effect of freezing these rates.
By the late 1960’s the fixed exchange rate system started to break down, due to a number of international political and economic factors. Finally, in 1971, President Nixon stopped the US dollar being converted directly to gold, as part of a set of measures designed to stem the collapse of the US economy. This was known as the Nixon shock, and lead to floating rate currency markets being established in early 1973. By 1976, all major currencies had floating exchange rates.
With floating rates, currencies could be traded freely, and the price changed based on market forces. The modern forex market was born.
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 currency to pay for goods and services. The participants include the following:
Unlike 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 currency around the clock, and the forex market has to be open for them to do this.
As with any market, the forex market is driven by supply and demand:
The following factors can influence exchange rates:
Despite all these factors, the global forex market is more stable than stock markets; exchange rates change slowly and by small amounts.
The forex market has many advantages. These include the following:
AfghanForeX makes the forex market available to retail investors like you. Sign up today for a Real Account or Demo Account and start trading!