What is Forex and Forex Trading?
If you have ever traveled to another country, you probably needed to exchange your money for another currency. In this case, you have already participated in Forex trading. The word “Forex” is an abbreviation for the words foreign exchange, ie. “foreign currency exchange”. It is also called “FX” and currency exchange.
The foreign exchange market (also Forex from the English. Foreign Exchange – “foreign exchange”, sometimes FX) is a system of stable economic and organizational relations arising from transactions for the purchase or sale of foreign currency, payment documents in foreign currencies, as well as transactions on the movement capital of foreign investors.
In the foreign exchange market, the interests of investors, sellers, and buyers of foreign exchange values are coordinated. Western economists characterize the foreign exchange market from an organizational and technical point of view as an aggregate network of modern communications that connect national and foreign banks and brokerage firms [3].
Operations in the forex market for purposes can be trading, speculative, hedging, and regulating (foreign exchange interventions by central banks).
Forex trading in a nutshell
As you can imagine, Forex trading is a little more than just a holiday currency exchange. Companies use different currencies to buy goods in other countries. To buy these goods, they need to get the local currency first, just like we do when we go on vacation. The only difference is that these companies exchange money in huge amounts.
With currency exchange around the world, exchange rates are constantly changing. This is how it works:
Trading currencies is like exchanging money on vacation
When currencies are exchanged, each has a specific price: the exchange rate. As with any other commodity, the price of a currency is determined by the law of supply and demand.
If there is a high demand for a certain currency – for example, many people or companies want to exchange their country's currency for the euro – and the value of the euro will rise and the exchange rate against other currencies will change. You can use this principle and make a profit. For example, let's think about a vacation trip.
Let's say you live in Europe and go on vacation to the United States. You need to exchange euros for US dollars. When exchanging, you get $ 1.40 for one euro. You change € 500, therefore, you are given $ 700.
You are heading home in two weeks, but you have $ 250 left. Since you no longer need dollars, you exchange them back for euros.
With this, you notice that the price of the euro against the dollar has changed – now the exchange rate is $ 1.30 for one euro, so you get about € 190. If the exchange rate remained at $ 1.40, you would only receive € 180. Thus, you have made a profit.
Successful trading is all about using the exchange rate to make a profit
Here's an even clearer way of explaining this principle using the same example:
Let's say you exchanged your € 500 for US dollars and got $ 700, but you didn't spend a single dollar and came back with $ 700 in your wallet. After changing the exchange rate from $ 1.40 to $ 1.30, you get € 538.5 back instead of € 500. And you earned € 38.5 simply by keeping your money in dollars while the exchange rate changed. In fact, this is exactly how trading in the foreign exchange market takes place. We buy a certain amount of currency, hold it until the exchange rate changes, and then exchange it back at the changed rate, receiving the income from the operation.
Trade that suits your lifestyle
Using a currency exchange office to supplement your budget a little with the currency left over from your vacation is not the most practical type of Forex trading. Fortunately, there is an easier way to do this: through online currency exchange agencies called “brokers”.
This means you can exchange currencies online and make money thanks to constantly changing exchange rates. As in the vacation example, you can buy different currencies and make a profit when the exchange rate between currencies changes – this is Forex trading.
Online Forex trading has many advantages:
You can make transactions from your home or any other place that has an Internet connection.
Forex never sleeps. It works around the clock on weekdays and can fit your pace of life.
You don't need to have a ton of money to start trading. All you need to make transactions is to have only $ 150 and gradually increase your account size.
Forex trading will not make you rich overnight, but it can provide a steady income along with your regular job. It may even become your business, depending on the amount of time you are willing to put into it.
Of course, you will have to put in some effort for this, but that's exactly what trade is for – helping you master trading to the extent that suits your personal lifestyle and helping you find your way in the Forex market.
The modern forex market
On August 15, 1971, US President Richard Nixon announced a decision to abolish the free convertibility of the dollar into gold (he abandoned the gold standard), thereby unilaterally refusing to comply with the Bretton Woods Agreements (according to which the dollar was backed by gold and all other currencies with the dollar).
In December 1971, the Smithsonian Agreement was reached in Washington, according to which, instead of 1% fluctuations in the exchange rate against the US dollar, fluctuations of 4.5% were allowed (9% for non-dollar currency pairs). This destroyed the system of stable exchange rates and was the culminating event in the crisis of the post-war Bretton Woods monetary system. It was replaced by the Jamaican monetary system, the principles of which were laid down in March 1971 on the island of Jamaica with the participation of the 20 most developed states of the non-communist bloc. The essence of the changes that took place boiled down to a more liberal policy in relation to gold prices. If earlier exchange rates were stable due to the action of the gold standard, then after such decisions the floating gold rate led to inevitable fluctuations in exchange rates between currencies.
