Anyone that wants to make a living from trading Forex needs to understand the basics of the Forex market to a very reasonable extent. By so doing, there will be a high possibility to make a smooth and profitable Forex career.
It is quite unfortunate that many do not find the time to study the market before investing in it; which has continued to result to losses of about 90% of trades that take place in the Forex market.
In this article, the focus will be on the basic things one must understand before investing in the Forex market, but first, here is a brief history of the Forex market.
The international monetary system has come a long way; from the early days of gold standard system, to this era of social trading.
These improvements were initiated by major market players who came up with theories on how best to approach trades; some of which are still viable to this day. The history of the international monetary system has continued to evolve, and traders need to understand how it works and apply this understanding in their trades.
The gold standard system is a monetary regime that allows the dominating government currency to be fixed and be freely converted to gold. This system also supports the use of gold or bank receipts for gold to be used as the principal medium of exchange. With this system, gold or gold receipts also serve as a standard of international trades, wherein the exchange rate of different countries are fixed based on the relative gold equivalent values between individual currencies.
Before the advent of fiat currencies, gold and silver were used for payments in national and international trades. A person can give a certain quantity of gold in exchange for a measure of merchandise; that (and some other outdated methods of payment) was the nature of all kinds of trade in the past.
This method of trading had some major issues though. The values of these metals were greatly affected by the rate of global supply and demand. If the demand for gold is high, then its value will be high; but if the demand for it is low, then its value will be low. Also, if the supply of gold is low, then the value will go up, but if the supply is high, then its value will reduce.
A typical example of this is the discovery of new gold mines, which leads to a greater supply of gold, and a reduction in the value of gold metal. This theory of supply and demand is an age long theory that still applies in Forex trading in this present age, even though the gold standard is no longer largely practiced.
The gold standard eventually crashed in the beginning of world war two. But before then, major economic countries have allocated a certain amount of their currencies to a measure of gold (in ounce). And with time, the difference in the value of two different currencies can be gotten by comparing both currencies with regards to the value of gold. With time, international trades were conducted with these differences serving as the exchange rate between two currencies. That was how Forex trading, as we know it today, started.
Though the gold standard has been dropped, it is still an ultimate form of monetary value, and can be relied on as a safe haven for financial stability. The current financial systems are not reliable. The US dollar, for instance, has almost inevitable inflationary implications as a result of increasing government borrowing to print paper money. One of the major implications of this is that the USD has recently developed and inverse relationship with gold metal. Investors have no option but to invest in gold as a way of hedging against the inflations.
Although the gold standard is no longer as widely practiced as before, it still exists. A lot of Forex trading platforms offer gold currency pairs to be traded by their clients, and like was mentioned earlier, investors put their money in gold in order to avoid the implications of unstable economy suffered by most currencies (if not all). Initially, as a beginner, Forex traders are normally interested in trading major currency pairs, which by the way is a really good place to start Forex trading; but as they advance in skills and experience, they tend to invest in gold as a result of the level of stability it brings to the table.
Just like the gold standard system, the Bretton Wood System also played a very important role the history of Forex. It was introduced around World War II with the main purpose of replacing gold with the USD as the main standard for converting the world currencies.