Let’s start with Forex history.
Modern currency exchange, or at least as it is currently known, started around 1944 when the global economy was just recovering from several tragic wars.
This included the Great Depression and two world wars.
To revitalize the economy that was destroyed prior to those tragedies, countries around the world had to come up with a new financial system that would be stable and promote growth.
To achieve this goal, global leaders from all 44 allied nations drafted the Bretton Woods Accord.
Members of the defeated Axis Powers, including Japan and Germany, later adapted the terms of this agreement and implemented it in their own economy.
After the wars, the United States established itself as the strongest economic power.
This meant that its currency was the most stable amongst all the other currencies during that time.
It was then decided that the United States Dollar would become the backbone of the new financial system.
The US dollar’s price was then pegged to the price of gold, which started out at US$35 per ounce.
Other currencies from the rest of the countries were then pegged to the US dollar.
The development of the world’s financial system and the adaption of the Bretton Woods Accord also gave rise to two important global financial institutions, namely the World Bank and the International Monetary Fund (IMF).
The World Bank was given the power to make loans to countries with struggling economies.
This would promote development and rehabilitation efforts within those countries, especially those that were devastated by the wars.
The IMF, on the other hand, could make loans to the different central banks, which it did to stabilize exchange rates.
While the Bretton Woods Accord has initially worked for most of its members, it gradually proved itself to be unsustainable.
Exchange rate pegs were increasingly difficult to maintain due to various economic re-balancing factors.
The IMF attempted to avert the crisis by drafting the Special Drawing Rights (SDRs), a currency that could transcend national and governmental boundaries denominated in gold.
Member countries were allocated this currency, which they could use to stabilize their respective local currencies.
This effort proved to be insufficient to stave off a predicted massive overvaluation of the US dollar to the price of gold.
The situation worsened when the United States raised the price of gold, effectively devaluing the US dollar.
The United States, under President Nixon, also imposed import controls to prevent further capital loss.
In 1973, the Bretton Woods system was scrapped and replaced with the Bretton Woods II system.
The new financial system now allowed foreign currencies to fluctuate relative to other currencies depending on different market forces.
Within a span of a few years, major currencies were now floating and not necessarily pegged to the US dollar. This was the start of Fiat Currencies.
While most of the world has now adapted this system, there were still some stragglers.
Until 1992, the British pound was still being pegged to the Deutsche mark. Oil-rich countries continue to peg their currencies to the US dollar. Developing countries, including China, still peg their currencies to the US dollar and Euro.
The current trading system is still far from perfect, and there have been a lot of countries that have defaulted on their debt obligations.
However, if you are an absolute beginner or an experienced trader, you must understand the history of Forex trading.
These events must be learned and understood because these events might repeat and it may affect the Forex market.
History is a constant factor.
Even though Forex market is uncertain, you can still enjoy endless opportunities.
Size of the Market
Even if you know the history, it will not be beneficial if you don’t know the size of the market.
The majority may not realize it; the amount of money being transacted on the Forex market is actually quite staggering.
The average daily turnover for today’s Forex markets continually exceeds US$4-5 trillion.
The majority of the trading happens with the US dollar and Euro pair; which represents more than 10 percent of the total transactions.
The Forex market also dwarfs the number of transactions made in the New York Stock Exchange and NASDAQ, which only churns out a measly US$150 billion in
daily equities trades combined.
The Forex market has all but doubled in size in the last five to six years.
Despite its massive size, the Forex market has remained to be obscure to most people.
Its retail penetration has remained minimal, with most brokers remaining small operations within the global scale.
A lot of brokers have now become household names due to an increasing interest in the Forex market, with the retail growth in Forex expected to continually grow over the next few years, with more and more investors and amateurs now joining in.
Forex is now slowing moving into the mainstream.
It is turning out as one of the best income generating sources.
The Forex market size itself makes it an ideal choice for trading.
The liquidity of the market provides a simple path for traders, so they trade currencies easily.
Due to this, tight spreads are created resulting in favorable quotes.
The Forex market is a desired market in the industry due to its large scope and low costs.
If you consider the trader’s viewpoint, they have numerous benefits from the large Forex market.
As traders, you must understand the size of the market if you want to let your trading strategy work on a better scale.
So, how do the key constituents of the Forex market comprise?
Banks are the most powerful participants in the Forex market.
The most substantial amount of exchanges are done between banks, and it eventually facilitates the clients.
However, finally, investment managers, central banks, corporations, hedge funds, and retail traders complete the market.
Also, remember, the Forex market attracts traders due to the level of liquidity; yes, it is extremely liquid.
This is one of the important factors that let the traders enter and exit trades within market opening hours.
Due to liquidity, the price fluctuations in the Forex market is lower, so it makes things easier for the traders.
However, liquidity will vary between trading sessions and currency pairs.
The major currency pairs, USD/JPY and EUR/USD yearly, values up to 41% of all trades.
The USD has significant control, i.e., 85% of trading volume.
As beginners, you must make an effort to understand the charting methods, fundamental analysis, and technical analysis.
Once you do, you’d be able to master the market well.
Before you begin trading this large market, you must make sure to consider the analysis that suits your trading style.
However, I’ll make it easier by mentioning the most important pillars of trading that a naive trader must understand.
When you are in a large market like the Forex market, you have to understand the money management concept.
Most naive traders exit from trading even before they test the market because of a lack of understanding about the money management concept.
You must possess a clear view of the risks and rewards ratio.
If you know this ratio, you can use it when entering into trades, exiting trades, and also when measuring the trade size.
The price charts are considered the best tools by most traders, and they rely entirely on it when making decisions.
If you learn the ways to read charts you’d be able to understand the points that charts are trying to point out, price points and trends.
Through this, you can decide when to exit and enter the Forex trades.
Supply and demands of currencies are considered when trading the Forex market, and it is fundamental analysis.
Factors that impact supply and demands are inflation, employment, interest rates, economic growth, and other risks.
Anyway, you must have an understanding of the market size.
Most beginners enter the market without any knowledge about the market size. But, it is not at all recommended!
If you want to become professional traders, you must start from scratch.
Of course, it might take some time to learn the market, but learning is important if you want to trade Forex successfully!