What is Forex Trading ? – An Introduction to the World of Currency Trading

A Brief History of the Foreign Exchange Market

The creation of the gold standard monetary system in 1875 marked one of the most significant  events in the history of the Forex currency market. As countries each attached an amount of their currency to be equal to an ounce of gold the changing price of gold between two currencies became the first standardized means of currency exchange in history.

World War I brought with it the breakdown of the gold standard due to the major European powers not having enough gold to exchange for all the currency that the governments were printing off at the time in order to complete large military projects. The gold standard was used again between the wars, but by the start of World War II most countries had again dropped it, however gold never lost its spot as the ultimate form of monetary value.

In 1944 the Bretton Woods System was implemented and led to the formation of fixed exchange rates that resulted in the U.S. dollar replacing the gold standard as the primary reserve currency. This also meant that the U.S. dollar became the only currency that would be backed by gold. In 1971 the U.S. declared that it would no longer exchange gold for U.S. dollars that were held in foreign reserves, this market the end of the Bretton Woods System.

It was this break down of the Bretton Woods System that ultimately led to the mostly global acceptance of floating foreign exchange rates in 1976. This was effectively the “birth” of the current foreign currency exchange, although it did become widely electronically traded until about the mid 1990s.

What is the Forex Market used for?

Forex trading involves transactions in which one party purchases a quantity of one currency by paying in a quantity of another currency. The Forex market is a global decentralized financial market for the exchange of currencies. Around the world various financial centers act as hubs for trading between a wide range of different types of buyers and sellers 24 hours a day, except weekends. It is the foreign exchange market that determines the value of one country’s currency relative to another.

The primary reason the Forex market exists is to

       Electronic trading, sometimes called etrading, is a method of trading securities (such as stocks, and bonds), foreign exchange or financial derivatives electronically. Information technology is used to bring together buyers and sellers through electronic trading platform and networks to create virtual market places such as NASDAQ, NYSE Arca and Globex which are also known as electronic communications networks (ECNs).

List of trading losses

The following contains a list of trading losses of the equivalent of USD100 million or higher. Due to the secretive nature of many hedge funds and fund managers, some notable losses may never be reported to the public. The list is ordered by the real amount lost, starting with the greatest.

Forex Market Overview

Introduction

The following facts and figures relate to the foreign exchange market. Much of the information is drawn from the 2010 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2010. 53 central banks and monetary authorities participated in the survey, collecting information from 1,309 market participants.

Excerpt from the BIS:

"The 2010 triennial survey shows another significant increase in global foreign exchange market activity since the last survey in 2007, following the unprecedented rise in activity between 2004 and 2007. Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007. This increase brought average daily turnover to $4.0 trillion (from $3.3 trillion) at current exchange rates...The higher global foreign exchange market turnover in 2010 is largely due to the increased trading activity of “other financial institutions” – a category that includes nonreporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, among others. Turnover by this category grew by 42%, increasing to $1.9 trillion in April 2010 from $1.3 trillion in April 2007." - BIS

Structure

• Decentralised 'interbank' market
• Main participants: Central Banks, commercial and investment banks, hedge funds, corporations & private speculators
• The free-floating currency system arose from the collapse of the Bretton Woods agreement in 1971