FOREX

WHAT IS FOREX

Forex is a market in which participants are allowed to buy, sell, exchange and speculate on currencies. The markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and investors. Currently, the Forex market is considered to be the largest financial market in the world with an equivalent of over $3.2 trillion daily turnover; more than three times the total amount of the US Equity and Treasury markets combined. The trading volume has increased rapidly especially after exchange rates were allowed to float freely in 1971

Besides, Forex is believed to be the most efficient financial markets because the currency market is large and liquid and it is constructed of a global network of computers that connects participants from all around the world.

FOREX HISTORY

Long ago, the world’s economy was based on the bartering system in which the value of a particular item was measured by its worth in exchange for other items. However, this system had apparent restrictions. There was no way of obtaining items needed if there are nothing valuable to be exchanged. This created the need to establish a more adequate way of buying and selling early in history. In various cultures and economies, anything could be considered valuable as long as there was a need for it. Eventually, precious metals such as gold and silver had become the monetary standard. The current online Forex history begins in 1973 even though currency trading has been around since the era of ancient Egypt, which at that time the market was extremely prehistoric, and there were no advance trading tools. The first currency coins were used at the era of the Pharos, and the first paper notes were then introduced by the Babylonians. Soon after, the roman coin called aureus was used, which was followed by the denarius. Both coins had been used worldwide, making them the first global foreign currency coins. Before the beginning of World War I, the “gold standard” has been employed to allow a national currency to be exchanged only for gold in order to prevent governments from arbitrary emission, which accelerates inflation, but this standard has been unable to solve all problems. Very few people took advantage of this practice because many often felt it was unnecessary for the government to stock a full reserve of gold in their central banks. A country’s growing economy led to the import boost to a point where gold resources were depleted. Thus, the amount of money in circulation decreased resulting in interest rates grew and economic activity slowed down to the stage of recession. After World War II, great instability arises. England and other European countries were left in ruins after the war ended, while the US’s economy was left relatively stable and strong. The Dollar also became the new global reserve currency, and remained so throughout the rest of the Forex history. The Bretton Woods agreement was then existed under in which exchange rates of national currencies were fixed to the dollar and the dollar itself was pegged to gold with the price per ounce set equal to 35 dollars. Participating countries agreed to maintain the value of their currency with a narrow margin against the dollar and a corresponding rate of gold as needed. Currencies devaluing to countries’ trade advantage were prohibited and were only allowed to do so for devaluations of less than 10%. A new international financial network was formed. Yet, post-war reconstruction of the global economy and the increase in trade between the countries demanded a reconsideration of the fixed rate and in 1971, the agreement was temporarily suspended. The US Dollar is no longer convertible into gold. By 1973, currencies of major industrialized nations floated more freely. Currencies were controlled mainly by the supply and demand forces. Prices were floating daily, with volumes, speed and price volatility all increasing throughout the 1970s, giving rise to new financial instruments, market deregulation and trade liberalization. In 1994, the first online currency trading was seen introduced in Forex history. For simplicity, the process of Forex evolution can be viewed in the flowchart above.

FOREX MARKET

It has the deepest liquidity, the widest accessibility and low starting fees of any financial market in the world. The Forex market is a worldwide decentralized over-the-counter financial market. Thus, Forex operate on a 24-hour basis, spanning from one zone to another in all the major financial centers. If the European session is ended, the Asian session or US sessions will starts, so all world currencies can be continually in trade excluding weekend. The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Traders act in response to news when it breaks, rather than waiting for the market to open, as is the case with most other markets. Significant news is released publicly so everyone in the world receives the same news at the same time. Actual monetary flows as well as anticipations on global macroeconomic conditions are usually the source of Forex exchange rate fluctuations.

CURRENCY PAIRS

In Forex, currencies are traded against one another. Each currency pair composes an individual trading product and is noted by XXX/YYY, where XXX and YYY are the ISO international three-letter code of the currencies involved. The first currency (XXX) is the base currency which is quoted relative to the second currency (YYY), usually named the quote currency. For example, 1.5710- the exchange rate of GBP/USD is the price of the pound sterling expressed in US Dollars, meaning 1 pound sterling = 1.5710 Dollars. The most famous trade currencies are listed in the table below as well as its ISO code:

Currency United States dollar Euro Pound sterling Japanese yen Australian dollar New Zealand dollar Swiss franc Canadian dollar
ISO code (symbol) USD ($) EUR (€) GBP (£) JPY (¥) AUD ($) NZD ($) CHF (Fr) CAD ($)

According to the Bank of International Settlements (BIS) study, the most heavily traded products were:

  1. EURUSD: 27%
  2. USDJPY: 13%
  3. GBPUSD: 12%

and the US currency was involved in 84.39% of transactions, followed by the euro (39.1%), the yen (19.0%), and sterling (12.9%). Volume percentages for all individual currencies should sum up to a total of 200%, as each transaction involves two currencies.