Disclaimer: Forex trading involves high risks, with the potential for substantial losses and is not suitable for all persons. The views expressed in this blogsite are those of the author(s) and do not necessarily reflect the official policy, position, or opinions of AlterForex.

by: Benton Pena - CEO AlterForex.com

“Trading is an elusive beast to the uninitiated, filled with mystery and complexity.” - The Options Course.

First of all I will define what Forex is… Forex stands for Foreign Exchange, to clarify this term let’s talk about currency markets. Most countries have their own currencies. These currencies go up or down relative to each other based on a number of factors such as economic growth (present and future), interest rates, and supply and demand.

Most major currencies are quoted against the U.S. dollar.

Therefore, there will typically be an inverse relationship between the U.S. dollar and other currencies. The major currency futures traded at the Chicago Mercantile Exchange include the following:

• Euro (ECU or European currency unit).
• Swiss franc.
• British pound.
• Japanese yen.
• Canadian dollar.

If the U.S. dollar goes up, then the Japanese yen will drop along with other foreign currencies. Keep in mind that the Canadian and U.S. dollars move similarly due to their physical proximity and the closeness of their economies. Each of these currencies will then have a rate relative to each of the others. This cross-reference is referred to as the cross rate. The yen/pound, euro/dollar, and so on will have their own rates at which they may be traded.

Why are currencies traded? As you are probably aware, many products are sold across borders. A company may sell $100 million worth of computer equipment in Japan, and will likely be paid in yen. If the company prefers to be paid in U.S. dollars, it can go into the futures market or cash market “traded from bank to bank” to change its yen purchase. By selling yen futures contracts, the company can lock in its profits in U.S. dollars. Speculators are also active in the currency markets, buying and selling based on their predictions for the changes in cross rates. Trillions (yes, trillions) of dollars are traded each day in the currency markets, 24 hours a day.

More about Forex
Over the last three decades the foreign exchange market has become the world’s largest financial market, with over $1.5 trillion USD traded daily. Forex is part of the bank-to-bank currency market known as the 24-hour Interbank market. The Interbank market literally follows the sun around the world, moving from major banking centers of the United States to Australia, New Zealand to the Far East, to Europe then back to the United States.

A little bit of History

The foreign exchange market (FX or Forex) as we know it today originated in 1973. However, money has been around in one form or another since the time of Pharaohs. The Babylonians are credited with the first use of paper bills and receipts, but Middle Eastern moneychangers were the first currency traders who exchanged coins from one culture to another. During the middle ages, the need for another form of currency besides coins emerged as the method of choice. These paper bills represented transferable third-party payments of funds, making foreign currency exchange trading much easier for merchants and traders and causing these regional economies to flourish.

From the infantile stages of forex during the Middle Ages to WWI, the forex markets were relatively stable and without much speculative activity. After WWI, the forex markets became very volatile and speculative activity increased tenfold. Speculation in the forex market was not looked on as favorable by most institutions and the public in general. The Great Depression and the removal of the gold standard in 1931 created a serious lull in forex market activity. From 1931 until 1973, the forex market went through a series of changes. These changes greatly affected the global economies at the time and speculation in the forex markets during these times was little, if any.

The Bretton Woods Accord

International Monetary Fund - The first major transformation, the Bretton Woods Accord, occurred toward the end of World War II. The United States, Great Britain and France met at the United Nations Monetary and Financial Conference in Bretton Woods, N.H. to design a new global economic order. The location was chosen because, at the time, the U.S. was the only country unscathed by war. Most of the major European countries were in shambles. Up until WWII, Great Britain’s currency, the Great British Pound, was the major currency by which most currencies were compared.

This changed when the Nazi campaign against Britain included a major counterfeiting effort against its currency. In fact, WWII vaulted the U.S. dollar from a failed currency after the stock market crash of 1929 to benchmark currency by which most other international currencies were compared. The Bretton Woods Accord was established to create a stable environment by which global economies could restore themselves. The Bretton Woods Accord established the pegging of currencies and the International Monetary Fund (IMF) in hope of stabilizing the global economic situation.

Now, major currencies were pegged to the U.S. dollar. These currencies were allowed to fluctuate by one percent on either side of the set standard. When a currency’s exchange rate would approach the limit on either side of this standard the respective central bank would intervene to bring the exchange rate back into the accepted range. At the same time, the US dollar was pegged to gold at a price of $35 per ounce further bringing stability to other currencies and world forex situation.

The Bretton Woods Accord lasted until 1971. Ultimately, it failed, but did accomplish what its charter set out to do, which was to re-establish economic stability in Europe and Japan.

The Beginning of the free-floating system

After the Bretton Woods Accord came the Smithsonian Agreement in December of 1971. This agreement was similar to the Bretton Woods Accord, but allowed for a greater fluctuation band for the currencies. In 1972, the European community tried to move away from its dependency on the dollar. The European Joint Float was established by West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. The agreement was similar to the Bretton Woods
Accord, but allowed a greater range of fluctuation in the currency values.

Both agreements made mistakes similar to the Bretton Woods Accord and in 1973 collapsed. The collapse of the Smithsonian agreement and the European Joint Float in 1973 signified the official switch to the free-floating system. This occurred by default as there were no new agreements to take their place. Governments were now free to peg their currencies, semi-peg or allow them to freely float. In 1978, the free-floating system was officially mandated.

In a final effort to gain independence from the dollar, Europe created the European Monetary System in July of 1978. Like all of the previous agreements, it failed in 1993.

The major currencies today move independently from other currencies. The currencies are traded by anyone who wishes. This has caused a recent influx of speculation by banks, hedge funds, brokerage houses and individuals. Central banks intervene on occasion to move or attempt to move currencies to their desired levels. The underlying factor that drives today’s forex markets, however, is supply and demand. The free-floating system is ideal for today’s forex markets. It will be interesting to see if in the future our planet endures another war similar to those of the early 20th century. If so, how will the forex markets be affected? Will the dollar be the safe haven it has been for so many years? Only time will tell.

final words:

Forex, FX or Foreign Exchange is the purchase or sale of a currency against sale or purchase of another. Trading currencies in the Forex market is in many ways more advantageous than trading stocks or futures. Look at all the advantages below available to our investors and traders:

• Trading Forex is a true 24-hour market.
• Low minimum investment compared to trading stocks.
• Forex trading automation due the using of statistical analysis software.
• Forex trading offer much greater buying power than day trading stocks, which only offers 4:1 margin.
• Small Trading Spreads - 3 Pips in major currency pairs
• Superior liquidity. Global currency market is a 1.3 trillion dollars a day market.
• Low transaction costs. It is much more cost-efficient to trade FX in terms of both commissions and transaction fees.
• Can make money in rising and falling markets.
  There are no restrictions to sell currencies short, unlike stocks which
  have to be sold short on an up tick rule. This means that as a Forex
  trader you can make money just as easily in rising and falling markets.

more information about Forex and Forex Managed Accounts at http://www.alterforex.com