Our website is intended to be a forex guide in itself, so you might see different concepts detailed in some separate articles or links. But here I will give you a brief overall picture for you, just to know where you are “located” in this huge forex market, and how you can relate to the other market participants.
From a historical point of view, the foreign currency exchanges took place first from the necessity to equate several currencies from different countries when exchanging goods. So foreign currency exchanges are primarily related to the import and export activity around the world. Not more than 40-50 years ago, all the amount of currencies in circulation were related to Gold. The Gold Standard was kept until the year of 1971.
Do you know how much an ounce was valued? It was the equivalent of 35$ and this ratio was fixed, until President Nixon abolished the Gold Standard. And all other majors were expressed in terms of gold. This way, until 1971 the total amount of money in the world was perceived as being limited, as it was related to a limited amount of gold.
As the world economies were expanding, and the US economy was accumulating external deficits, it looked that this model will not work beyond a certain level, and this happened during the seventies. At that time, money got a more “abstract” form: now currencies can be issued by any government or central bank, without equating this to something material. You might have heard the expression “dematerialized money”, right? This is because when you change some money to travel abroad, you don’t think about gold or any other commodity isn’t it? However, from a macroeconomic perspective, the value of a currency is backed in the long-run by the total amount of goods and services.
How did we get to trading forex ourselves from a computer?
A second step to widening the access to foreign currency trading, or forex trading, was in the ’80s and ’90s, when banks and companies got involved in several type of deals. A primary need of a company or an investor is to protect, or to hedge a deal against major currency fluctuations. That is how futures contracts and options were developed. On the other hand, more and more market participants took speculative positions. That means that some investors were not really interested
This evolved in the third stage, and now almost 95% of the trades worldwide are speculative in nature, just 5% being backed by some real deals (like imports and exports). This is important for you to know, because you will be part of a speculative game. You might win overall, and we intend to give you or indicate you appropriate tools for this, but there are also risks of losing.
Now, when you sit by your computer and trade, you will speculate that one currency will rise and the other one will fall in value. Unless you have to do with exports and/or imports of goods or services for yourself or your company, you will most of the time be in a speculative position, one way or another.