What is Forex?
The Forex markets are the largest financial markets by turnover globally with between $5-7 trillion exchanged each day. Effectively, Foreign Exchange markets simply deal with the exchange or transfer of one currency for another. This may be done for a variety of reasons.
- Corporates needing to transfer revenues between currencies
- Investment Banks on behalf of their clients
- International capital flows from Investment Funds and Asset Managers
- Speculation from Hedge Funds and other trading/ speculation entities (including retail traders/ investors).
You can see more details of what Forex is in our article here, What is forex and how can you trade it?
The Forex Trading that is offered to individuals and retails investors globally is based on Contracts for Difference or CFDs. Forex Trading accounts are simply CFD trading accounts, that are specifically focused on currency markets trading and investing . So, Forex trading is basically a subset of CFD trading, which you can learn more about in our article, CFD (Contracts for Difference) trading explained.
Forex Market History
Forex markets today are complex electronic markets, but started many centuries ago. Forex market began back in the Holy Land in Biblical times and in ancient Greece and Egypt,
with money changers. The first international banks developed in the Middle Ages which saw currency transfers and exchange spread through Europe and the Middle East.
What is considered the more modern era for foreign exchange, however comes in 1875 with the advent of the Gold Standard Monetary System. The gold standard meant that governments promised to exchange an exact amount of gold for their currency (and vice versa), in essence the individual currencies were backed by gold, which meant that governments required a gold reserve to meet the demand for currency exchanges. By the late 19th Century major economies had “pegged” their currency to an ounce of gold, which meant that the exchange rate for two currencies was derived from the price of of gold in the currencies.
The gold standard broke down at the beginning of World War I, as European nations printed money to pay for war, meaning there wasn’t enough gold to exchange for the currency that was being printed. At the end of Worlds War II the Bretton Woods Agreement saw the US Dollar replace the gold standard as the primary reserve currency and the benchmark for currency conversions. This ended in 1971with the Smithsonian Agreement which and by February 1973, European countries and Japan move to a free-floating system. In the modern era we have freely floating exchange rates for most major global currencies, though central banks do sometimes intervene to try to stop aggressive currency moves.
What we need to learn to trade Forex
To become successful at any discipline needs time and dedication. Here we will look at some of the ways that you can look to become successful as a Forex trader.
- Education: To be proficient and then excel in any process that requires a thought process needs education. We would certainly recommend learning as much as possible from reliable sources like AskTraders.com. If possible, it would also be beneficial to enroll on an accredited financial market trading and investing course.
- Macroeconomic and geopolitical knowledge: The macroeconomic data for the large global economies, the major Central Bank events and speakers and the large geopolitical events (Brexit, trade war etc) all impact Forex markets. If you are serious about trading Forex you need to be aware of what has happened, what could happen today and in the future. Traders need to monitor and read the major financial markets newswires and other reliable sources such as AskTrader Steve Miley’s What to Watch This Week.
- Technical Analysis: The understanding of price action and the ability to read price charts is a key discipline for any Forex trader to master. A strong knowledge of Dow Theory, price patterns, Japanese candlesticks and momentum oscillators is essential for any individual Forex trader.
- Managing you emotions: A knowledge of psychology and behaviour is essential for any trading and trader. For Forex traders, having an awareness of emotions and dealing with those emotions is a huge benefit when speculating on markets. If emotions impact on a traders decision making, then it is far more difficult to achieve and maintain profits.
- Market wisdom: Unfortunately, wisdom is not instant, it is knowledge applied over time and requires experience. However, by applying time to analysis, looking at both fundamentals and by doing technical analysis, the individual trader can it good time gain market wisdom.