Demystifying Forex Trading

What is forex trading?

The term 'forex' is coined from the terms foreign and exchange. Forex trading, also known as currency market is an international market involving almost if not all nations. It is a market that is involved with the exchange of currency between traders. The traders in this market include:

• Institutional investors 

• Governments 

• Importers 

• Exporters 

• Brokers 

• Banks 

• E.tc

What is involved in a forex transaction?

One party to a transaction uses a certain amount of a given currency to obtain an amount of another currency. For example an American importer wanting to import goods from the United Kingdom will use a certain amount of American dollars to obtain a given amount of sterling pounds, the currency in use in the United Kingdom. This is necessary for the importer in order to purchase the goods he wants to import because the goods are quoted in the domestic currency.

History of forex trading

Forex trading has been around for quite a long time, in fact since the 19th century. Forex trading was developed due to the need for international trade. Initially there used to exist the gold standard system which was created in 1875. In the system each country that participated or that wanted to participate in the international trade would attach a certain amount of their currency in equation to an ounce of gold. The whole aim of this monetary system was to standardize the forex trade. Later on during the World War II, the system broke down due to insufficiency of gold in the major European countries. This was replaced by the Bretton woods system. With the system the American dollar replaced gold in the reservation of currency. The system was in use until 1971 when the US government refused to exchange dollars for gold. After this breakdown a new system called the floating foreign exchange rate was developed in 1976 and it is the one that is being used until today.

Benefits of the forex market

The forex market is influenced purely by the forces of supply and demand. It is very close to a perfect market. The main aim of this market is to facilitate trade internationally between countries. Trading in the market does offer the trader the following benefits:

• Flexible hours of trade as the trading go on throughout the day.

• A trader can trade in the market from anywhere in the world and at any time so long as they have an access to the internet.

• The variables to be considered before engaging oneself in the market are few in comparison to the normal financial markets, therefore making the market very convenient for the traders.

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