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About FOREX market / Foreign currency (or forex) trading refers to buying and selling currencies online on the foreign exchange market, that is, trading currencies against one another in pairs, with the aim to make profits.
The foreign exchange, or forex, market is the worldwide largest market for international investment and trade on different currencies online. Without any actual physical location for buying and selling currencies, it is characterised by a decentralised structure and accessible via the Internet by investors around the world.
With its ability to facilitate the buying and selling of financial assets without causing drastic asset price changes, the foreign exchange market has the highest liquidity in the world. The market daily average turnover is over $5 trillion today, with over 80% of this growth mainly attributed to the trading activity of financial institutions through which the foreign exchange market operates. These major market participants include, among others, large central banks, institutional investors (organisations that invest large amounts of money in securities and other assets), currency speculators, governments, financial services providers (such as banks, trust companies, insurance companies), and retail investors.
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The foreign currency market, unlike the stock market, is segmented into different access levels, having the interbank market at the top level (including the largest commercial and central banks in the world like Citi, Deutsche Bank, Barclays Investment Bank, UBS AG, HSBC, JP Morgan, or Goldman Sachs). Just like the foreign exchange market, the interbank market is also decentralized, encompassing the biggest commercial and investment banks, with almost 40% of all transactions carried out by top-tier banks. This is followed by the next level, which comprises medium-sized and small banks, hedge funds (private investment partnerships open to a limited number of investors only), commercial companies, retail ECNs (Electronic Communication Networks), retail forex broker companies, and retail traders (individual traders and investors).
With the advent of online trading platforms in 1996 the number of individual retail foreign exchange traders, who trade currencies and other financial instruments, has grown to a considerable segment of the forex market in terms of importance and size.
FOREX Trading historical overview
The history of the various factors and major events that have shaped the forex market and currency trading to how we know them today can be traced back to prehistoric times, when trading was solely based on bartering (i.e. exchanging) goods without the actual use of currencies.
The beginning of modern foreign exchange is marked by the year 1880, when the Gold Standard monetary system was introduced, which emerged as a good alternative to compensate for the deficiencies of the old barter system. The most outstanding feature of this system was the fixed exchange rate set up by one country to another country’s currency, regardless of the means of exchange (banknotes or coins) they had in use. Not only did this facilitate trade between two different currencies but it also helped to control currency behavior and keep inflation down.
The 20th century witnessed a fast growth of foreign banks, especially in England, with as many as 40 foreign exchange broker firms in London by 1922 and with about half of the world’s foreign exchange being conducted in pound sterling. At that time, New York, Paris and Berlin were known as the most active trade centers. After World War II, the Bretton Woods Accord established the rules of financial relations and limited currency fluctuation within a range of 1% to the currencies par value. However, after the collapse of the Bretton Woods agreement the system of fixed rates exchange gradually turned into a free-floating currency system. Towards the end of the seventies nation-state dependent and heavily controlled foreign exchange took a major turn and gradually changed into floating market conditions.
How to FOREX trading work?
With its vast geographical dispersion, huge trading volume and 24-hour nonstop operation, except for weekends, the foreign exchange market is regarded as unique.
Forex trading is done on currency pairs (i.e. the quotation of the relative value of one currency unit against another currency unit), in which the first currency is the called base currency, while the second currency is called quote currency. For example, the quotation EUR/USD 1.2345 is the price of the euro expressed in US dollars, which means that 1 euro equals 1.2345 US dollars. The most frequently traded currency pairs (also called majors) include USD (US dollar), EUR (euro), GBP (British pound sterling), CHF (Swiss franc), JPY (Japanese yen), CAD (Canadian dollar), and AUD (Australian dollar).
Currency trading can be carried out 24 hours a day, from 22.00 GMT on Sunday until 22.00 GMT on Friday, with currencies traded among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Paris, Sydney, Singapore and Hong Kong. Typically, three are major trading sessions characterized by peak activity, also regarded as the powerhouses of day-to-day transactions: the European, the Asian and the North American sessions.
Currency Trading Today
Today online currency trading is widely pursued by individual and corporate investors and traders around the world. It involves the buying and selling of various tradable financial assets online such as debt securities (banknotes or bonds), equity securities (stocks) or derivative securities (futures, options, swaps).
Since the end of the 1990’s currency trading, that is trading currencies from different countries against each other, has been a widely used form of investing by means of an electronic network and typically with brokerage companies providing online trading platforms to allow investors direct and real-time access to the global markets.
Before the birth of the Internet, investing was only possible by placing orders on the telephone through stockbrokers licensed to buy and sell stocks, bonds or other securities on the behalf of retail and institutional clients. As professional individuals who would act as the legitimate employees of brokerage firms or broker-dealer companies, stockbrokers would place investors’ orders through a stock exchange (such as the London Stock Exchange, the Tokyo Stock Exchange, or the New York Stock Exchange), or by off-exchange trading (directly between two parties) in return for a commission or fee for their services. All client orders handled by stockbrokers, who would thus act as intermediaries between investors and the financial markets, were entered in the brokerage firms’ systems, which were linked to trading floors and stock exchange centers.
1994 marks the advent of a significant growth in online trading. This was the year when the first brokerage firms started offering a groundbreaking service that changed the process of investing via the Internet: the possibility for investors to place their orders directly online and even trade through computer-driven electronic communication networks.
Since that time, foreign exchange, or currency, trading has become a worldwide popular form of online investing, which can be performed by practically speaking anyone who has Internet access. It is typically done on the online trading platform provided by a broker company, with trading orders placed with just a few clicks by clients and then passed over by the broker to the interbank market, which is the top-level foreign exchange market of banks exchanging various currencies. As soon as clients close their trades, their respective broker company closes their positions on the interbank market within a matter of seconds and credits clients’ trading accounts with the profit or the loss gained.
Today any online investor can have direct access to the global markets via online trading platforms and follow real-time price quotes on the 24-hour nonstop foreign exchange (forex) market. Trading platforms, among which MetaTrader 4 is the most acknowledged one, can be regarded as the core of the trading process as they allow investors to buy and sell currencies, or any other financial securities, by using built-in trading tools such as technical analysis charts, real-time streaming price quotes, news releases, and customized back testing to help trade profitability.