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Forex For Beginners, And How Forex Works

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Forex For Beginners, A Brief History And How Forex Works

Forex
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 Summary:

·         Brief History

·         Forex Information

·         How are exchange rates determined?

·         The difference between Forex and stocks

·         The peculiarities of Forex

Brief History

Forex, as it is now, has been around since the 1970s. In the past, the gold standard was used to define the value of a currency. A weight of gold was fixed, which corresponded to the value. The exchange of coins and notes for gold was certified by the state.

Thanks to this system, the value of a currency was very stable. There was no fear that it would lose value since it was directly linked to the value of gold. Currency conversion was, therefore, also easy since the value of the currencies was always the same.

In the past, the price of gold was much less volatile than it is today. It was during the 1st World War that Western countries abandoned the gold standard. The United States did the same later because of the Great Depression of 1933.

In 1944, after the Normandy landings, the allies met in Betton Woods to discuss how the world economy would be structured after the war. It was at this meeting that the IMF was founded.

The United States has reintroduced the gold standard into its monetary system, thus pegging all other currencies to the dollar. These are connected to the gold standard via their parity with the dollar. In this way, the US dollar became the international reserve currency, which is still the case today.

However, in 1970, the United States was forced to abandon the gold standard due to the rising cost of the Vietnam War. This ended the agreement at Bretton Woods, which ensured monetary stability by linking the most virtual currency to the gold standard.

Despite this, the dollar remained the reserve currency, which means that since that time, international monetary stability has been closely linked to the stability of the US dollar. This was the beginning of the era of floating currencies. The price of currencies is, therefore, now determined by the free market.

Forex Information

The term “Forex” is an acronym for “foreign exchange”, also called the foreign exchange market. It is the largest financial market in the world. It is an over-the-counter market, which means that the orders do not pass through the stock exchange but are carried out by the participants themselves. There is no supervisory authority. As Forex is a market without a central exchange or supervisory authority, this market is open 24 hours a day, five days a week. It remains open as long as there are banks to process currency orders.

Until a few years ago, the leading players in the foreign exchange market were banks, multinationals and governments. But in recent years, a new player with much impact has come into play: the individual trader. Initially, Forex was mainly used to ensure the proper functioning of the international monetary system. But today, 70-90% of order volume comes from speculation. That is to say; people try to earn money by exchanging currencies. This is also the case for other financial markets.

How are exchange rates determined?

In forex, the value of one currency is determined relative to another currency. They are traded in pairs. For example, the euro against the dollar, whose currency pair is indicated as EUR/USD (euro/dollar). When the demand for euros increases, the EUR/USD pair rate also increases. When demand decreases, the EUR/USD pair also decreases.

All currencies are quoted against each other. It is, therefore, possible to trade hundreds of currency pairs on forex. The most crucial currency pair is EUR/USD.

A currency pair is represented by the code of the two currencies separated by a “/”. For example, EUR/USD, GBP/USD, USD/JPY, etc. Currency codes consist of 3 letters. The main ones are:

USD = US Dollar
EUR = Euro
JPY = Japanese Yen
GBP = British Pound
CHF = Swiss Franc
CAD = Canadian Dollar
AUD = Australian Dollar
NZD = New Zealand Dollar

The first code corresponds to the base currency, and the second to the “counterparty” or “quote” currency. The base currency is the one you bet on when you buy. If you sell, you bet on the counter currency.

We say we open a position when we buy or sell a currency. If, for example, you think the euro will rise against the dollar, you would open a long position on the EUR/USD pair. If you think the opposite, you will open a sell position on this exact pair.

The difference between Forex and stocks

The main difference between stocks and currencies is that if you own a company, you become one of the company's owners. In forex, you own money. A forex position has no intrinsic value. Also, if you own a stock, you will likely receive dividends.

The price of a share of a company that is in good financial health should generally go up over the long term. On the other hand, the price of a currency pair will tend to fluctuate rather than rise over the long term.

Forex is, therefore, a speculative market rather than an investment market. We earn money by speculating the rise or fall of a currency over a certain period.

Another difference, Forex traders very rarely take the currencies they buy. Forex is not based on material property.

Finally, the stock market is more expensive. It takes more capital to buy a stock. This does not allow small investors to trade in this market. For example, with 1000 euros, it is not worth buying shares; in addition, there are management costs and broker fees. On the other hand, with this same sum, you can benefit from the forex.

The peculiarities of Forex

As we mentioned earlier, with the arrival of the internet, individuals can now easily invest in the Forex market. Forex offers different lot prices. In the beginning, it took 1000 dollars to buy a lot of EUR/USD.

Now brokers are offering micro lots. So you can buy a lot for 10 cents. You can start trading forex with a small capital, like 200 euros.

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