BrokerYard Introduction to Forex

A Brief Histroy of Forex

The exchange of currencies dates as far back as the first form of simultaneous exchange of valuable items between two parties. Currencies defined rates of exchange giving specific exchange value to items such as food, clothing, metals and any usable item.

The history of currencies goes through many eras and fundamental changes, in short currencies changed from having a specific unchangeable value to being pegged against a country’s gold reserve and the gold reserve currency, which was the British pound until the U.S. dollar became the reserve currency after the Second World War. This system was known as the gold standard and it lasted between 1870 and 1914.

The monetary system was forever changed in 1944 when the International Monetary Fund (IMF) was created under the Bretton Woods system due to the dire need for financial support in the aftermath of the Second World War, marking the first time currencies of different countries worked under one system. Bretton Woods was dissolved between 1968 and 1973 and by March of the latter year major currencies were made to float against each other breaking the gold standard and starting the free floating economy system. Since then members of the IMF can choose any form of exchange arrangement for their currencies except pegging it to gold and therefore the movement of free floating currencies created the forex market that we now know.

Opening positions based on the changing exchange rates used to take place on trading floors, through phone calls between clients (investors) and licensed brokers who physically placed the order of clients without themselves becoming principals in the transaction. Their job was to find the right counterpart for a client quickly without revealing the identity of either party until an agreement has been reached. Trading floors are now rare to non-existent due to the use of the internet which has allowed brokers to operate online, and offer platforms which allow clients direct access to the market without any human or third party intervention hence the modern forex trading system which exists today.

 

What is Forex

Forex is a direct result of money exchange, however trading forex is based on speculations of the movement of world currencies against each other.

Forex traders simultaneously buy one currency while selling another depending on their speculation of market movement.

Forex trading takes place ‘virtually’ meaning no ‘real’ money is exchanged instead it all takes place online through special platforms which serve as portals to the market and are provided by forex brokers.

In simpler terms the selling and buying of forex currencies is no different than exchanging one currency for another. If a British tourist visited the United States of America and exchanged their British Pounds (GBP) with the US dollar (USD) they are buying the USD at its current price while selling the GBP. If the value of the USD is greater than the GBP the British tourist will gain the difference between the two currencies in that exchange, if however the value of the USD is lower than that of the GBP then the British tourist will lose money from that exchange.

When trading, the same process takes place on the trading platform as traders buy one currency while selling the other expecting their sold currency to remain at a higher value than the one they bought. Or the other way around they sell a currency at a certain rate expecting the currency to move down where they can buy it again at a cheaper rate and gain the difference between the sell and repurchase.

Forex traders are mainly speculators who operate in their own interest, taking advantage of opportunities to make profits.

 

Forex Broker

A forex broker is a financial company licensed to offer clients a portal to the market allowing them to place trades on market movements. Forex brokers can operate as STP (Straight through processing) brokers or market makers.

STP brokers offer direct access to the market, meaning their clients’ trade directly on the market without intervention from a third party, and profits and losses from trades do not in any way affect the profits or losses of the broker.

Market makers add pips on the quote they receive from the market, and use that difference to make commissions, and they make profits from.

 

Pips

A pip is the smallest decimal in a forex quote – or the last number in a currency pair’s price.

The smallest movement of a pip can make a difference in the results of a trade. Some brokers display four digit quotes while some display five digit quotes to allow the monitoring of the smallest movements in price.

 

Ask/Bid Price

Ask Price is the exchange rate at which a dealer will sell the other currency.

Bid Price is the exchange rate in a currency at which a dealer will buy the other currency.

 

Spread

Ask Price is the exchange rate at which a dealer will sell the other currency.

Bid Price is the exchange rate in a currency at which a dealer will buy the other currency.

 

Long / Short Position

A long position or going long is when a trader buys a currency pair at a certain price hoping it will move upwards and be sold at a higher price at a later point.

A short position or going short is when a trader sells a currency pair at a certain price hoping it will move downwards and can be bought at a cheaper price at a later point.

 

Currency Pair

Forex is based on the buying of one currency and selling of another and it can only happen with a pair of currencies, one which will be sold and one which be bought.

Currency pairs appear with the abbreviations of both currencies together, for example the EUR/USD or EURUSD is the currency pair for the Euro and the U.S. dollar.

Currency pairs cannot be changed each currency pair is fixed and is chosen as a ready pair. Currency pairs exist as pairs of all currencies in the free floating economy system.

 

Forex Quote

A forex quote is the price of a currency pair. The forex quote represents the price with which a quote currency can buy the base currency. So if the EUR/USD is at 1.1160 that means 1 Euro can buy 1.1160 U.S. dollars.

 

Base & Quote Currency

The base currency is the first quoted currency in a currency pair. For example in the EUR/USD pair the EUR is the base currency.

The quote currency is the second quoted currency in a currency pair. For example in the EUR/USD pair the USD is the quote currency.

 

Bear and Bull Market

A bear or bearish market is a market that is constantly losing value and moving downwards, it is called a bear market after a bear’s fighting technique of attacking its predators from above and pushing it down.

A bull or bullish market is a market that is constantly gaining value and moving upwards, it is called a bull market after a bull’s fighting technique of attacking its predators from below with its horns and shifting them upwards.

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