Forex, short for foreign exchange, refers to the global marketplace where currencies are traded against each other. It is the largest and most liquid financial market in the world, with an average daily trading volume exceeding trillions of dollars.
History of Money
If you want to trade forex, you should know about currencies. The money we use today, like the dollar, euro, and pound, only emerged after the gold standard ended in 1971. These currencies have been in existence for a much longer period. For instance, the US dollar and the British pound have centuries of history. The euro is relatively new, having been introduced in 1999. The abandonment of the gold standard in 1971 did mark a pivotal shift in the international financial system.
So money can change and has changed often. The chance of it changing in our lifetime is very high. For example, You might have heard about things like cryptocurrencies, which aim to do things that regular paper money can’t do well.
At the beginning we used barter system, In a barter system, individuals or communities would exchange goods or services with one another based on mutual needs and wants. For example, a farmer might exchange a portion of their crops for clothing made by a tailor, or a blacksmith might exchange tools for food provided by a hunter.
While the barter system facilitated trade and enabled people to acquire the goods and services they needed, it had limitations. These included the need for a coincidence of wants, the lack of a standardized measure of value, and the difficulty of dividing goods into equal portions for exchange.
So, we required something that could basically meet a few criteria. Firstly, we needed something that could act as a medium of exchange. This means I could use it to pay you back if I’m receiving something from you. Secondly, it needed to retain its value over time so that I could use it to buy goods and services in the future. And finally, it needed to serve as a unit of measurement for value. For instance, I should be able to determine the worth of an apple or a pair of jeans in terms of this thing, allowing me to compare and understand the value of each item.
And the most commonly used one was gold. Why? Well, because it’s scarce, meaning there’s not a lot of it around, which is crucial. It’s also difficult to obtain and very durable. So, it was highly favored and met all those criteria. We relied on it for the longest time.
However, it still had issues, such as being hard to transport and prone to debasement. So, we transitioned to using paper bills.
One of the earliest known examples of paper money dates back to around 7th century China during the Tang Dynasty. Merchants and traders in China used promissory notes, known as “jiaozi,” as a form of currency. Merchants or wealthy individuals issued these notes, which could be exchanged for goods and services.
It’s essentially like I.O.Us, a paper note saying “I owe you” a certain amount of gold. The use of paper bills in ancient times was often limited to specific regions or cities and was not as standardized or widely accepted as modern currency. Additionally, the value and legitimacy of paper bills were often based on the reputation and trustworthiness of the issuer rather than any intrinsic value.
This marks the start of central banks, where only the central bank is authorized to issue I.O.Us. The government of its country regulates it. However, the problem arose when some countries began printing too many I.O.Us, causing problems between nations using each other’s currencies and within their own borders. So, it became clear that we needed to secure our currency, and that’s when the gold standard was introduced.
The US began using it around 1879. The gold standard is basically a system where a country’s currency is backed by gold. What this did was put a cap on how much governments and banks could print paper money, so they couldn’t just print as much as they pleased.
However, due to World War 1, countries needed to spend a lot of money, so they printed more, but they didn’t have enough gold to support all that money. So, in 1930, the US and UK stopped exchanging cash for gold coins. This introduced FIAT currencies, the type of currency we use today. However, this brought back the problem of printing too much money again, with countries devaluing their currencies to boost exports. To address this, the Bretton Woods Agreement was reached, where all currencies were linked to the US dollar, and the dollar was linked to gold. This allowed countries to hold US dollars as reserves, and it was also when the IMF and World Bank were established.
But it didn’t take long to change from that. The end of the gold standard came in 1971 when the US stopped exchanging gold for their dollars. Why? Because the US didn’t have enough gold to support their currency due to printing too much. So, basically, at that point, the US dollar was floating, not backed by anything. And this is the currency we use now, a currency that isn’t backed by anything.
What is Forex Trading?
We’re aware that each country has its own currency. If we want to do business with other countries and buy their products, we must use their currency to pay. So, we have to swap our currency for theirs. This occurs at foreign exchanges. That’s why it’s called Forex Trading. Also, Forex trading happens over-the-counter (OTC), which means transactions occur directly between buyers and sellers, usually through electronic trading platforms or brokerages. And this is why its the most liquid financial market.
How to Make Money Trading Forex?
Now, let’s focus on the most crucial part: how do we profit from trading forex? For that let’s have an example.
Imagine this: you plan to go on vacation to India. To buy things there, you need Indian rupees. So, you exchange some of your dollars for Indian rupees, let’s say $1000. The exchange rate is 1 USD for 83 INR at the time, so you get 83,000 INR. You use your credit card for expenses in India and return home without spending the INR. Now, you want to exchange the INR back to USD, but the exchange rate has changed. Now, 1 USD gets you only 80 INR, meaning the value of INR increased compared to USD. If you exchange now, you get 1037 USD instead of 1000 USD. By exchanging currencies and holding for a bit, then exchanging back, you made a profit of 37 USD. This is what forex trading is about.
Now, we do this by using a broker and their online trading platform. The trading currencies are often referred to as pairs, like EURUSD, GBPUSD, and EURJPY. They’re called currency pairs.
Now, you might ask, “Why do I have to know about all this history if I just want to trade forex?” Well, you’re right. You don’t actually need to know all of this, but you have to understand that the money we use today could change. By knowing the problems with currencies and their attempts to solve them, we understand how to value our money. Even if it won’t help much, it will lay a solid foundation for your trading journey. You will know exactly what is happening.
Conclusion
In conclusion, Forex is the largest financial market globally, where currencies are traded against each other. The history of money reflects its evolution from the barter system to paper bills, central banks, and, eventually, fiat currencies. Forex trading occurs at foreign exchanges, facilitated by brokers and online platforms. To profit, traders capitalize on currency fluctuations, exchanging currencies at favorable rates. Overall, Forex presents opportunities for individuals to participate in global currency markets and potentially generate profits through strategic trading.
