Until the 1970s, the exchange rate of a particular currency was determined by the country's gold reserves. That was due to the fact that global markets were regulated by the gold standard. Each currency had its equivalent in a troy ounce. However, the situation has changed over time since the gold standard was abandoned. It was replaced by a system of floating exchange rates when the value of a currency was determined by its supply and demand. This is how the forex market has been established.
In the forex market, a currency unit of one country is sold for a certain number of units of the other country. It is rather difficult to imagine how to sell money for money. For this reason, you may consider currency as a stock that gives you the right to a share in the country's economy. That is why the economic resilience of a country is determined by the stability of its currency. Thus, when trading forex, we trade "parts" of the countries’ economies.
Why is Forex so unique? Imagine a market where you can sell or buy anything you want. You bring a product to this market and you immediately find a buyer willing to pay a mutually beneficial price. These are the characteristics of an ideal market with high liquidity. Liquidity is an opportunity to sell or buy a product at a mutually beneficial price, or, in other words, exchange the product for the money and vice versa. How does the ideal market operate? There is a ban on monopoly, fair competition, a great number of participants, and round-the-clock operation. These are the main but not all requirements of an ideal market. First of all, you should remember that the forex market has the highest liquidity among all global markets!
Forex daily turnover exceeds $3 billion. Besides, every trader can easily enter the market. All you need is a certain amount of starting capital (we will discuss this issue later) and an Internet connection. Thanks to such a huge number of participants, no one can influence the supply and demand for any currency for a long time. All processes that affect supply and demand are natural economic processes characterized by regularity and unexpectedness. It is very crucial to understand and respond quickly to changes in these processes if you want to trade forex successfully. This strategy is called fundamental analysis. In addition, there is a technical analysis, which will be discussed later.
Interestingly, until the late 1990s, only large financial institutions and banks were able to trade in the forex market. It was necessary to have a large capital in US dollars to conclude buy/sell contracts between market participants. However, the development of the Internet has changed this practice as intermediaries or brokers have appeared. Taking advantage of margin trading, private individuals with significant capital can open long/short trades totaling thousands of US dollars taking risks with their own capital. Margin trading is the core of forex trading but we will talk about it later.
Forex does not have a physical location or a centralized exchange office. Investors trade forex all over the world! Trading is carried out 24 hours a day. According to the calendar day, trading begins in the southern hemisphere in Wellington (New Zealand), unfolds across time zones in Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt am Main, London, Zurich, and ends in New York and Los Angeles. Among the mentioned above cities Tokyo, London, and New York are the most important ones. Depending on the time of day, one currency may be more volatile than another, which is explained by the working hours of the main financial floors.
So, let us summarize the introduction. The international currency market has a number of advantages compared to the other markets, for example, the stock market where shares are traded. There is no need to be awake at night in the Far East of Russia waiting until the stock market in Moscow will be closed. Forex works around the clock and it has the highest liquidity in the world.
The development of the Internet contributes to the emergence of numerous brokers that provide individuals with the opportunity to work and make a profit on the Forex market. The development of the Internet contributes to the appearance of numerous brokers that enable individual investors to trade and make a profit on the forex market. Competition among brokers is very intense. As a result, brokers offer profitable trading conditions for individuals on Forex. In the introductory part, we deliberately did not use special terms. We did not want to overload the reader with an excessive amount of information. However, the following chapters are written in order to explain Forex trading.