Forex For Beginners, And How Forex Works (2024)

Forex For Beginners, A Brief History And How Forex Works

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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. Aweight of gold was fixed, which corresponded to the value. The exchange ofcoins and notes for gold was certified by the state.

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

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

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

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

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

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

Forex Information

The term “Forex” is an acronym for “foreign exchange”, alsocalled the foreign exchange market. It is the largest financial market in theworld. It is an over-the-counter market, which means that the orders donot pass through the stock exchange but are carried out by the participantsthemselves. There is no supervisory authority. As Forex is a market without acentral 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 processcurrency orders.

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

How are exchangerates determined?

In forex, the value of one currency is determinedrelative to another currency. They are traded in pairs. For example, the euroagainst 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. Whendemand 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 crucialcurrency pair is EUR/USD.

Acurrency 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 3letters. 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, andthe second to the “counterparty” or “quote” currency. The base currency is theone 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 acurrency. If, for example, you think the euro will rise against the dollar, youwould open a long position on the EUR/USD pair. If you think the opposite, youwill open a sell position on this exact pair.

The differencebetween Forex and stocks

The main difference between stocks and currencies isthat 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 astock, you will likely receive dividends.

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

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

Anotherdifference, Forex traders very rarely take the currencies they buy. Forex isnot based on material property.

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

The peculiarities of Forex

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

Now brokersare offering micro lots. So you can buy a lot for 10 cents. You can starttrading forex with a small capital, like 200 euros.

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