Foreign exchange forex trading- Spirit Inside

Foreign exchange trading can be full of jargon.

For instance the word Forex comes from an abbreviation for foreign exchange, which itself is further abbreviated to just FX on occasions.

Originally, paper currency served as a mechanism of exchange which was convertible into “hard money”, usually Gold or Silver.

During the Second World War, industrialized nations of the world signed the Bretton Woods agreement laying the foundation for international exchange going forward.

Under Bretton Woods, nations maintained exchange rates to the US dollar and the US dollar was fixed to Gold.

In 1971, under President Nixon, the US suspended the convertibility of the dollar into Gold and this action led to a system of free floating, fiat currencies.

The value of a nation’s currency, in relation to other currencies, was whatever the free market determined it was. Banks, international business and speculators instantly recognized both the risk and opportunity this new system presented. In essence, this was the birth of the Forex market as we know it today.

With the advent of the internet and online trading, the market became accessible to the masses. Hence, leverage was introduced and became an integral part of online Forex trading.

By taking a position 100 to 500 times your deposited capital, the market could offer significant return on investment, but also significant risk. It is the use of leverage and daily volatility which have led to the Forex market exceeding a volume of 4 trillion USD per day.

Unlike most goods and services, currencies cannot be valued in themselves. We can say that 1 barrel of oil is worth X US Dollars but it is not possible to say that 1 US dollar is worth 1 US dollar.

We can however, compare currencies- for example to say that 1 USD is worth X Euros or Y Japanese Yen.

For this reason, Forex trading must be done via “currency pairs” – the ratio of 1 currency to another allows the market to function. The most actively traded currency pairs are the EUR/USD, USD/JPY, GBP/USD, USD/CHF and AUD/USD based upon these abbreviations:
USD – US Dollar     GBP – Great British Pound
EUR – EU Euro     CHF – Swiss Franc
JPY – Japanese Yen     AUD – Australian Dollar

Every time a trade is executed, it is the simultaneous buying of one currency and the selling of another. This is not as complicated as it seems.

When traveling, if you exchange Euros for dollars, you are in essence “selling” your Euros and purchasing dollars. The counterparty to the transaction, is buying your Euros for his/her dollars at the price he/she set.

Leave a Reply