What is Forex?
The world runs on money. The global economy – and our very way of living – depends on the act of money changing hands. Not just in our country, but all over the world. The value of money in one country is largely based on the value of money in other countries.
What is the Foreign Exchange Market
Forex is a term that refers to foreign exchange, which is the market of trading one country’s currency for another. When you’re in another country, trading your country’s currency for the currency of the country you are visiting is what the Forex market is all about. In order to trade your U.S. dollars for another, for example – the Japanese yen, the foreign exchange rate between the two countries must be established.
Forex history begins long after the establishment of coins as a method of purchasing items. Often, trade outside of a country still relied on bartering, because the value of one currency was not always agreed upon by another country. Paper money in the form of IOUs was printed against the value of metals, such as gold, in the middle ages. The Knights Templar are said to have used this method when moving funds, forming the basis of our modern-day banking system.
Until World War I, most currencies in central banks were supported by the physical possession of gold. However, it became acceptable to print money without this backing, sometimes with disastrous results. The Bretton Woods agreement of 1944 was created to help stabilize local currencies and encourage fair exchange between countries.
Comparing one currency with another is the heart of Forex. Currency pairs – literally a pair of currencies – are compared with each other. For example, the U.S. dollar and the Euro… One currency has a particular value when traded for another currency. The currency value of each country is, in large part, based on the value of the countries that regularly trade with it, or have similar economies. How this is determined is a rather complex process, and will be discussed in another article.
Currencies are traded without a central exchange, which is different from how stocks and futures are traded. The Forex market is operated is Europe, Asia and the U.S. in different shifts, so currencies are constantly traded 24 hours a day. Foreign exchange trading between individual banks, banks and Forex brokers, and brokers and individuals, is conducted thousands of times every day. No single entity has the capability of influencing the market – at least for very long. This is truly a democratic form of trading.