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FOREX is a global market for trading one national currency against another. In other
words, it’s simply the buying and selling of money. The FOREX Currency Trading market
however involves practically every national currency available and you do it on
a global scale.
FOREX is a coined term for Foreign Exchange Market. It is interesting to note though
that there is no actual market place or an “exchange” in FOREX market, like you
see in the stock market. Trading or the buying and selling of currency are done
in a market place that is connected to each other electronically through inter-bank
system, or with traders through the internet or via overseas telephone communication.
It is this characteristic that makes FOREX the most accessible and liquid market
for all levels of participants from around the world. A small trader with $50 generally
has the same opportunities as someone with $50 million.
A Little Track back in History
Although the currency exchange has ancient roots, the modern foreign exchange market
traces its roots to the time when the Second World War was about to end. The Allied
powers consisting of the United States, Great Britain and France seek to stabilize
foreign exchange market through the Bretton Woods Accord. The Bretton Woods Agreement
in the year of 1944 set the dollar at a rate of 35 USD per ounce of gold, the US
dollar was made the common trading instrument and was pegged with other currencies.
The foreign exchange rates established in the Bretton Woods Agreement were destabilized
in 1971; the US dollar would no longer be exchangeable into gold. The free floating
system was mandated which allowed greater freedom for currencies to fluctuate independent
of the US dollar. The independent fluctuation provided by the free floating system
gave the money market the necessary boost. It made the FOREX fluid and gave greater
opportunity for global money traders to transact more profitably.
The technology age in the 1980s accelerated the fast growing rate of extending the
market for cross border capital movements through European, Asian, and American
time zones. Foreign exchange transactions increased from about $70 billion a day
to more than $1.5 trillion a day two decades later.
FOREX pairing…can someone please explain currency pairs?
FOREX trading is done in pairs. This is called currency pairing. For example, the
US dollar can be paired with Japanese Yen and the code for this FOREX pair is USDJPY
(or USD/JPY). These pairings are known as ISO codes (ISO stands for International
Organization for Standardization which is a global federation of national standard
bodies). The first currency of the pair (also known as the base currency) assumes
1 unit and the second currency (known as the counter currency) will reflect its
value in number units of the counter currency (which can be greater or less than
1). For example it can be shown on the FOREX market that the pair USD/JPY has an
exchange rate of 107.91. It only means that the 1 unit of US Dollar (the base currency)
is equal to107.91 units of Japanese Yen (the counter currency).
What does FOREX really represent?
Here is simplistic analogy to explain what a currency is? Just as you see company
value in terms of its share prices, (the share prices reflecting the relative strength
and economic well being of a company), the currency is somewhat similar in reflecting
the economic strength of a country. Just as you would study a companies balance
sheet and its revenues which will ultimately determine the value of its share, a
countries balance sheet (balance of payments, GDP etc) reflect the strength of that
country and its ultimate reflection in its shares (its currency). It is a simplistic
example as there are elements that you would not or could not value when looking
at a country, and usually companies can be valued a lot easily. Determining the
true value of a currency in relative terms has at best been a fleeting endeavor,
hence the speculative growth and a level playing field for small and large participants
alike.
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