A history of Forex Throughout history, in times before money was invented a barter system was used. It was a common practice for people to trade goods and services for items of equal or similar value – items such as sugar, flour, clothing, labor, tools, teeth, leather, stones, shells and precious metals. The problem was that the barter system was imperfect and had many limitations; it was difficult to trade items with a fair and equal exchange for all parties involved. Between countries, exchange was preferred to be immediate which meant that one side of the exchange could not be delayed. Money was then introduced and acted as a benchmark, which in turn encouraged production; businesses and industries grew and flourished. During the Middle Ages paper money gained acceptance as bulky, heavy coins were quite impractical, especially for travelers abroad; their only real benefit was their durability. Exchanging goods, services and coins between countries dates back to the ancient times, however, the Foreign Exchange market as is know today is relatively new. It has undergone a major revolution over the past 100 years due to the world becoming smaller through the development of faster transportation and new technologies. The Foreign Exchange is essentially the simultaneous exchange of one country’s currency against another county’s currency. From the middle ages right up to WWII it was fairly free of speculators (traders who would profit on the exchange rate movement), but following the war the speculator activity within the Foreign Exchange market increased significantly. The transformation was at the end of World War II, when the United States, France and Great Britain came together at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. From 1973 to 1998 the Foreign Exchange market, although conceptually similar to the one found today, was considered a ‘closed’ market limited to major banks, financial institutions, multi-national organizations and other large corporations. These institutions transacted in such gigantic volumes, hedging their multi-national exposure in a way that made impossible for any small individual to compete. Then in 1998 it became available for the smaller retail and individual investors to participate, and what followed was the ‘storm in the tea cup’ that ballooned its daily volume to over 100 times the total share market. In 1977 the foreign exchange was valued at $5 billion now it is a massive $3.2 TRILLION per day. (That figure is not a typo!). The Forex Market Today Today the Foreign Exchange goes by many names; Forex, Currencies, 4X and FX. It transacts over $3 trillion each and every day, making it the most liquid and efficient of the markets available. It is this very fact that makes it virtually impossible for companies or individuals to influence and manipulate market movements by trading large volumes on the more commonly traded currencies and sustain it for very long, therefore it can be considered as a very frank market. Another name is ‘spot trading’, (or foreign exchange spot trading), simply because the trades are settled almost immediately (within a maximum of 2 days).
The lucrative trading arena has an ‘open all hours’ appeal, where 24 hours a day, 6 days a week it is open through major locations such as; London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Paris and Sydney. The trading week starts in Sydney and finishes in New York on their Friday session close.
Unlike the stock markets which operate through ‘central stock exchanges’, the Forex market trades through a non-centralized “interbank” network. The network started around 1971 when most of the world’s largest currencies floated their exchange rates, and trading was predominately between the banks as an OTC (over the counter) product. Now with the advent of computers and technologies, Forex trading has become accessible to the average investor anywhere worldwide, fuelling the explosion to the point that the market is now made up of 95% of speculation and hedging purposes. An interesting point to note is that 80% of the foreign exchange transactions are held for under 7 days, and 40% are held for less than 2 days! Economic influences on the Forex The Forex market is heavily influenced by economic factors & world events. As it is almost always open, traders can trade the market as soon as news hits. Positions can be monitored online, anywhere, anytime giving the investor full control to enter or exit positions, change strategy or withdraw funds whenever they like. The Forex is highly sensitive to economic aspects, in particular the Gross Domestic Product (GDP), the Gross National Product (GNP), Inflation, and Employment Figures; and other issues such as political stability, financial and crisis factors. Economic data is generally released on a monthly basis, except for the Employment Cost Index (ECI) and the Gross Domestic Product (GDP) which are quarterly. (There are other releases weekly, which have minor affect on the FX movements). Important: Economic announcements are normally released between 08:30am-10:30am (EST) – this allows simultaneous access to important information for all market participants, which is very fair and reasonable. Forex traders need to keep an eye on the economic calendar to be aware of announcements and changes in conditions that may influence the market. These economic factors do not tell you if the market will move up or down, but can have a high impact on changing the direction or rapid movements. Economic Indicators and Calendars can be found on your broker's website or at websites similar to these: - http://www.money.cnn.com/
- http://www.bloomberg.com/
- www.moneycentral.msn.com/investor/home.asp
At times governments trade the market to influence the value of their currencies, this is called Central Bank intervention. They will either inundate the market with their home currency in an attempt to lower the price, or they will buy in the masses in order to raise the price. Both of these can cause huge price movements.
Watching the news releases on TV can be interesting via CNBC and Bloomberg stations receiving up to the minute news and updates. If you don’t have cable TV you can watch via the internet at sites similar to these; - http://www.cnbc.com/
- http://www.bloomberg.com/
- http://www.cbs.marketwatch.com/
- http://www.ragingbull.com/
- http://www.wsj.com/
- http://www.internetnews.com/
When working out what economic information you need to be reading, essentially you only need to worry about the releases that will directly affect either of the currencies you are trading, so there is no point in researching unrelated news. As you are trading one currency against the other, if there is good news for one side of the currency pair then it is very likely to be bad news for the other side – this will assist you to decide are you going long or short against one side of the currency pair. Version 2.0
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