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Article Series:
Learn Forex Trading / Currency Trading Tips
Foreign
Exchange Markets (FOREX):
A General Overview
In the beginning countries would trade with
each other using the barter system. If one nation needed lumber
but had cattle, they would trade one product for another. This
was pure trading. This type of economy has many limitations,
but served mankind well for many centuries. However, nations
quickly saw the benefit of having a system of exchange, and
while some cultures used pretty rocks, or animal teeth, precious
metals quickly became established methods of exchange. God
and silver were the most popular. Initially gold and silver
coins were used, and in fact the name of the British standard
currency, the pound sterling, came from the Hasterling region
where gold coins were made, and originally meant coins of the
Hasterling’s. Up until World War I most nations had central
banks that supported the value of their currencies and most
used gold as the standard. Paper money was printed and it legally
could be exchanged for gold but this did not often happen.
Since it was rarely converted, some banks and some nations
believed they no longer needed to keep reserves of gold in
their vaults, as the US once did with Fort Knox. Inflation
then occurred.
Near the end of World War II a conference known as Bretton
woods had many nations reach an agreement on a reserve currency
system based on the US dollar. The World Bank and other organizations
agreed, and a fixed exchange rate system was reached. The value
of the dollar was fixed on a certain amount of gold, and other
currencies were fixed on value to the dollar. Currency trading
after this however has evolved and currencies have grown in
value, and gone down in value, leading to fluctuation.
Today traders take advantage of the fluctuation in value among
currencies through the forex or foreign currency markets. It
is quite common to see a trader who suspects that the value
of the Euro will go up against the yen or the dollar and follow
the old axiom of “buy low and sell high.” On of the ways this
is done is through margin trading. With margin trading a trader
doesn’t have to have all the money in an account that is being
traded. If a trader has 10,000 and works with a one percent
margin, he is able to trade $100,000 in currency. This adds
great leverage to the trade and makes forex trading very attractive
to many who are looking for a large and quick return on their
investments. Forex traders are also attracted to the low costs
associated with trading since most trades are without commission.
The fact that there is a 24 hour trading cycle is also attractive
to many. Traders have opportunities for large profit, but they
also have risk inherent. An aggressive trader may experience
profit and loss swings of up to 30% in a day. This can be 30%
to the good, or to the bad, so forex trading requires education
and courage as well as capital. However there are no daily
limits and no restrictions on trading hours other than the
weekend when markets are closed. For this reason there are
always opportunities. Money will always be made.
Much of the forex trading that occurs however is not with
individual investors or speculators. Many commercial organizations
have currency exposures that are created due to import and
export activities. This is reason enough for many to engage
in forex trading. However, financial institutions remain the
biggest players in the forex market. Banks, brokers, mutual
funds and other major financial institutions are actively involved
in forex trading.
Some nations in the past have complained about hedge funds
and other large institutions involved in forex trading, saying
that they have intentionally devalued their currencies to make
quick profits. George Soros, the famous billionaire who is
involved in politics, has been accused of this practice by
the government of Indonesia. Whether it is true or not, and
if true whether it should or should not be done is not for
this article. However, when institutions control such large
amounts of money, the chance of manipulation does exist. As
long as foreign currency is traded, there will be such accusations.
However, the forex market remains a way to achieve substantial
financial gain. # # # # # SolveYourProblem.com : 2007
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