What Is The Forex Market All About?

The term 'Forex' is short-hand for 'foreign exchange.'  The Forex Market = The Foreign Exchange Market.

What is being exchanged on this market is not stocks or bonds, but currencies (monies) from around the world.

In other words, the Forex market is the place where U.S. dollars, Euros, Yen and other major currencies are bought and sold.  It represents the largest financial market in the world by volume.

The origins of the foreign exchange market date back to 1944, when The United Nations Monetary Fund convened in Bretton Woods, New Hampshire to devise a plan for stabilizing the world economy.

The British Pound had been, up until World War II,  the monetary unit of choice when comparing the relative value of foreign currencies. However, Hitler's regime managed to devalue the Pound by way of a massive counterfeiting scheme. Something had to be done quickly in order to avert a worldwide economic depression.

Out of this meeting came the Bretton Woods Accord. This new policy implemented the Gold Standard, tying the value of the U.S. Dollar to the price of one ounce of gold ($35.00 per ounce at the time). It was further agreed that the Dollar would replace the British Pound as the benchmark “currency of exchange”.

All other currencies were aligned to the Dollar, and a 'fixed exchange rate” of +/- 1% was established.

In other words, a foreign currency could fluctuate a maximum of 1% higher or lower than the    Dollar. Any fluctuations beyond this limit required that the 'offending' nation's central bank step in to correct the imbalance.

The Bretton Woods accord remained in effect until 1971, when it was determined that the U.S. dollar could no longer hold steady relative to gold. At this time, the 'fixed exchange rate' model was abandoned in favor of the 'floating exchange rate' we still use today.

Note: If any of these terms are unclear or confusing, don't worry. We'll look at them more closely when we get into the nuts and bolts of Forex.

The important thing to understand right now is that Forex trading among private investors is still relatively new. The market once operated almost exclusively between government (central) banks and commercial banks until advances in communication, such as the Internet and PC banking, allowed speculators easier access to the market.

The Forex Market today represents the largest and most 'liquid' of all markets in the world. The daily 'turnover' of trade volume, speaking in U.S. dollar terms, is on the order of trillions.

The major players involved in these trades are:

    Banks
    Governments
    Speculators
    Corporations
    Other, related financial markets and
institutions (e.g., brokers)

Now, one of the first things you must understand is that these institutions are NOT all on a level playing field with one another.