What Is Forex Trading ? Introduction and Definition

This is a free mini-course in foreign exchange trading, meant to expose you to the basics of forex trading and the forex market in an interesting way. While it is true that the information here […]

This is a free mini-course in foreign exchange trading, meant to expose you to the basics of forex trading and the forex market in an interesting way. While it is true that the information here can be found elsewhere, you are likely to be subjected to piecemeal segments in a rather boring and not engaging fashion. The difference this course provides is that I will try to make it as much fun as possible. The intention is to add the much-needed spark and make it a fun-filled experience.

Nevertheless, note that there is no central trading location for forex trading. The business is said to happen over the counter. Forex trading is not like stock trading which is centrally located. Forex is quoted by all the main banks and they often differ in their prices. Brokers collect such data from the various banks and post quotes for us. The broker-posted quotes are a calculated average of the prices offered by the banks. Therefore, trading is facilitated by the broker as he keeps a bit of the proceeds. Effectively, when you decide to go with a given currency pair, you are buying it from the broker such as tradefxasia.com or trade111.com, and not from other traders.

The History of Forex Trade

Well, buckle up for a bit of boring lecture. However, it’s worth your while to learn how the venture you are likely to toss yourself into came up. It is important to know why the forex market exists, in the first place, and how it evolved to what it is today.

In short, the gold exchange standard was put into effect sometime in 1876. The standard required that paper currency needed to be based on actual gold. The intention was to obtain stability for world currencies by linking them to the gold price at any given time. It was, theoretically, a marvelous idea. Practically, however, it generated boom-bust trends that led to the end of the gold standard. The gold standard came to an end in about the time the WW II began. One of the reasons for the collapse of the standard was that European countries did not possess sufficient gold reserves to back all the paper money they were printing to pay the huge military projects they embarked on. While the standard ended, gold maintained its status as the most important measure of the value of money.

There was a bit of confusion but a solution soon came to the fore. The world agreed to have fixed rates for exchange. It is from the foregoing that the US dollar emerged as the basic reserve currency. It would then be the only one that is backed by actual gold. It became a system referred to as the Bretton Woods System. It materialized in 1944. Further antics occurred in 1971 when the US declared that it would no longer agree to exchange its dollar currency for gold. Effectively, the Bretton Woods System also collapsed. The latter developments led to the, largely, globally accepted method of floating the exchange rates of foreign currencies. The new system came into effect in 1976. The foreign exchange trade was therefore born. The system stayed manual until 1991 when it was turned into a fully electronically executed trade. It is now time to delve a little deeper.

What is foreign exchange trading ?

From the perspective of retailers like you and I, forex trading is the speculation of the exchange rates of a currency against another. For instance, if you have a gut feeling that the value of the Euro will rise against the USD, you could buy the pair low and sell it at a higher margin to collect some profit. However, if it does not happen as you anticipated, i.e. the USD rises in value against the Euro; you are going to make a loss. Therefore, you must always note that forex trading involves a risk too.