Chapters 1  What is the Forex Market?

The foreign exchange market is where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, you have to pay the French for the cheese in euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros (EUR). The same goes for traveling. A French tourist in Egypt can't pay in euros to see the pyramids because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate.

One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney—across almost every time zone.

How Did It Start?

It all began with the gold standard monetary system back in 1875. Before our current system was born, gold and silver were exchanged for goods and services. The problem was that gold’s value changed depending on the supply – if a new source was discovered, gold would become less valuable. Eventually, different countries began to peg an amount of their currency to an ounce of gold. The difference between these amounts was the exchange rate. After World War One this system broke down, and several years later currencies were no longer pegged to gold. However, the forex market considers gold, silver and precious metal as tradable currencies.

FX trading used to be completed exclusively through banks and forex brokers. However, as technology has developed, FX trading has become far more accessible. Individual traders can now access the FX market from their smart phones, and complete trades on line.