Forex Overview

Each day, millions of trades are made in a currency exchange market called Forex. The word "Forex" directly stems off of the beginning of two words - "foreign" and "exchange". Unlike other trading systems such as the stock market, Forex does not involve the trading of any goods, physical or representative. Instead, Forex operates through buying, selling, and trading between the currencies of various economies from around the world. Because the Forex market is truly a global trading system, trades are made 24 hours a day, five days a week. In addition, Forex is not bound by any one control agency, which means that Forex is the only true free market economic trading system available today. By leaving the exchange rates out of any one group's hands, it is much more difficult to even attempt to manipulate or corner the currency market. With all of the advantages associated with the Forex system, and the global range of participation, the Forex market is the largest market in the entire world. Anywhere between 1 trillion and 1.5 trillion equivalent United States dollars are traded on the Forex market each and every day.

Forex operates mainly on the concept of "free-floating" currencies; this can be explained best as currencies that are not backed by specific materials such as gold or silver. Prior to 1971, a market such as Forex would not work because of the international "Bretton Woods" agreement. This agreement stipulated that all involved economies would strive to hold the value of their currencies close to the value of the US dollar, which in turn was held to the value of gold. In 1971, the Bretton Woods agreement was abandoned. The United States had run a huge deficit during the Vietnam Conflict, and began printing out more paper currency than they could back with gold, resulting in a relatively high level of inflation. By 1976, every major currency worldwide had left the system established under the Bretton Woods agreement, and had changed into a free-floating system of currency. This free-floating system meant that each country's currency could have vastly different values that fluctuated based on how the country's economy was faring at that time.

Because each currency fluctuates independently, it is possible to make a profit from the changes in currency value. For example, 1 Euro used to be worth about 0.86 US dollars. Shortly thereafter, 1 Euro was worth about 1.08 US dollars. Those who bought Euros at 86 cents and sold them at 1.08 US dollars were able to make 22 cents profit off of each Euro - this could equate to hundreds of millions in profits for those who were deeply rooted in the Euro. Everything in the Forex market is hanging on the exchange rate of various currencies. Sadly, very few people realize that the exchange rates they see on the news and read about in the newspapers each day could possibly be able to work towards profits on their behalf, even if they were just to make a small investment.
The Euro and the US dollar are probably the two most well-known currencies that are used in the Forex market, and therefore they are two of the most widely traded in the Forex market. In addition to the two "kings of currency", there are a few other currencies that have fairly strong reputation for Forex trading. The Australian Dollar, the Japanese Yen, the Canadian Dollar, and the New Zealand Dollar are all staple currencies used by established Forex traders. However, it is important to note that on most Forex services, you won't see the full name of a currency written out. Each currency has it's own symbol, just as companies involved in the stock market have their own symbol based off of the name of their company. Some of the important currency symbols to know are:

USD - United States Dollar

EUR - The Euro

CAD - The Canadian Dollar

AUD - The Australian Dollar

JPY - The Japanese Yen

NZD - The New Zealand Dollar

Although the symbols may be confusing at first, you'll get used to them after a while. Remember that each currency's symbol is logically formed from the name of the currency, usually in some form of acronym. With a little practice, you'll be able to determine most currency codes without even having to look them up.

Trading Online For Beginners

A career as an individual foreign exchange currency trader (also known as forex or fx trader) is one of the most ideal "jobs" in the world, especially if you love traveling, as you can trade from anywhere in the world as long as you have a good internet connection.

If you are trading forex on a part time basis, it is also flexible enough to accommodate the busy schedule of your full time job. You can plan when you want to trade for extra income, as the forex market is available 24 hours a day. You can still trade after your office hours in the comfort of your own home to supplement the income of your family.

If you are a mother, currency trading as a career would allow you the flexibility to be home with your kids. You can do your online currency trading when your kids are at school, while they are doing their homework, or while they are asleep. It allows you to earn some money from home while being there for your kids.

As a beginner in online currency trading, you may wonder where to start, as there are a lot of different currencies around the world. Almost every country has its own currency, but with regards to forex trading, the currencies traded are only the major ones that are widely used. These currencies are regarded as major currencies because they are considered economically stable compared with the other foreign currencies. The major currencies that are traded in the forex market are the Euro, British Pound, American Dollar, Canadian Dollar, Australian Dollar, Japanese Yen and Swiss Franc.

Before you can start trading, you will need to find a good forex broker that can help you during your trading. It is not easy for a beginner to know how to choose a good broker and avoid bad brokers. This is where guidance from an experienced forex trader, or coach who himself is a currency trader, is essential to the success of your forex trading as a career.

History of Foreign Exchange

5 Economic Events When Currency Rocked The World

These are changes in the currency markets which caused substantial impact in the world economy. It is important that people learn about currency movements and how the occurrence of such events provide lucrative opportunities for currency investors to profit from the forex markets.

Free Market Capitalism is Born

On August 15 1971, this date marked the end of the Bretton Woods system, a system that used to fix the value of a currency to the value of gold. The United States pulled out of the Bretton Woods Accord and took the US off the established Gold exchange Standard.

US were running a balance of payments deficit and a trade deficit back in the early 1970s due to the costs of Vietnam War and increased domestic spending has accelerated inflation. The US government used up almost all of his reserves and gold reserves by that time. Hence it began to print more dollars to supplement its expenditure. In short, most countries lost faith in the dollar as it is overvalued against gold. The international community dumped their dollars in exchange for gold.

The fact is there was not enough gold in the US vault to pay back the international community. US government had printed too much dollar and they were broke.

Following that, President Nixon shocked the world. The event was informally named 'Nixon Shock' because President Nixon and 15 advisors removed US from the Gold Exchange System without consulting the members of the international monetary system.

US dollars was the first currency to be floated- that is, exchange rates were no longer the principal method used by governments to administer monetary policy but is solely determined by supply and demand market forces. By 1976, all the major currencies were floated. The forex markets were started.

Devaluation of U.S Dollar - Plaza Accord

In the early 1980s, the US Federal Reserve System under Paul Volcker had overvalued the dollar enough to make US exports in the global economy less competitive. The U.S government faced a large and growing current account deficit, while Japan and Germany were facing large and growing surpluses.

This imbalance could create a serious economic disequilibrium which would result in a distortion of the foreign exchange markets and thus the global economy. The result of current account imbalances and the possibility of foreign exchange distortion brought ministers of the world's leading economies - France, Germany, Japan, the United Kingdom, and the United States together in New York City.

The Plaza Accord was signed on September 22, 1985 at the Plaza Hotel in New York City, agreeing to depreciate the US dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets.

The effects of the Plaza Accord agreement were seen immediately within 2 years. The dollar fell 46 percent and 50 percent against the deutsche mark and the Japanese Yen. Devaluation of the dollar stabilise the growing US trade deficit with its trading partners for a short period of time. As a result, U.S. economy became more export-oriented while Germany and Japan became more import-oriented.

The signing of the Plaza Accord was significant in that it reflected coordinated actions with respective governments were able to regulate the value of the dollar in the forex market. Values of floating currencies were determined by supply and demand, but such forces were insufficient, and it was the responsibility of the world's central banks to intervene on behalf of the international community when necessary.

To date, we still see countries that continue to regulate value of its currency within a certain band in the forex market. Example of one country is Japan.

Black Wednesday - The Man Who Broke the Bank

Black Wednesday refers to the events on 16th September 1992 when George Soros placed a $10 billion speculative bet against the U.K. pound and won. He became the man who broke the Bank of England.

In 1990, U.K. joined the Exchange Rate Mechanism (ERM) at a rate of 2.95 deutsche marks to the pound and with a fluctuation band of +/- 6 percent. ERM gave each participatory currency a central exchange rage against a basket of currencies, the European Currency Unit (ECU). This system prevents the exchange rate of participatory currencies from too much fluctuation with the basket of currencies.

Until mid 1992, economy began to change in Germany. Following reunification of 1989, German government spending surged, forcing the Bundesbank to print more money. German economy experienced inflation and interest rates were raised to curb inflation.

Other participatory countries in the ERM were also forced to raise interest rates so as to maintain the pegged currency exchange rate. The rate hike led to severe repercussions in the United Kingdom. At that time, U.K. had a weak economy and high unemployment rate. Maintaining high interest rates is not sustainable for U.K. in the long term, and George Soros stepped into action.

George Soros was said to profit $2 billion from the Black Wednesday. This single event showed that with knowledge and experience, investors could profit from the forex market. No central banks can control the forex markets.

Asia Currency Crisis

Leading up to 1997, investors were attracted to Asian investments because of their high interest rates leading to a high rate of return. As a result, Asia received a large inflow of money. In particular, Thailand, Malaysia, Indonesia, Singapore and South Korea experienced unprecedented growth in the early 1990s.

These countries fell one after another like a set of dominos on July 2, 1997, showing the interdependence of the Asian 5 Tigers' economies. Many economists believe that the Asian Financial Crisis was created not by market psychology but by shrouded lending practices and lack of respective government transparency.

In early 1997, Thailand current account deficit has grown consistently up to a level that is believed to be unsustainable. Shrouded lending practices oversupplied the country with credit and in turn drove up prices of assets. The same type of situation happened in Malaysia, and Indonesia.

Levels were reached where price of assets were overvalued and coupled with a sn unsustainable trade deficit, international investors and hedge fund managers began to sell Thai baht and neighboring countries' currencies hoping to profit from the plunge.

Following mass short speculation and attempted intervention, the Asian economies were in shambles. Thai baht was sharply devalued by as much as 48 percent and Indonesian rupiah fell 228 percent from it previous high of 12,950 to the fixed U.S. dollar.

The financial crisis of 1997-1998 revealed the interconnectivity of economies and their effects on the global currency markets. The inability of central banks to intervene in currency markets provided yet another lucrative opportunity for currency investors to profit.

The Euro: Best Reserve Currency after Dollar

The name Euro was officially adopted on 16 December 1995. The Euro is the official currency of 16 of the 27 Member States of the European Union. Euro is the second largest reserve currency and the second most traded currency in the world after the U.S. dollar.

As of November 2008, with more than €751 billion in circulation, the euro is the currency with the highest combined value of cash in circulation in the world, having surpassed the U.S. dollar. Based on IMF estimates of 2008 GDP and purchasing power parity among the various currencies, the Eurozone is the second largest economy in the world.[1]

Value of Euro and the U.S. dollar are inversely correlated. Should the dollar fall, value of Euro currency will rise. Euro will be the best choice to shift money to, should the value of U.S. dollar continue to fall. This makes the Euro the best substitute currency for the dollar.