The term Forex trading is shorthand for foreign exchange currency trading, which is the market based on speculating on the shifting values of different world wide currencies in the hope of making a profit. The real beginnings of Forex trading can be traced back many centuries to the days of the barter system. Due to the issues with bartering, various cultures came up with currencies that were able to be traded like the money of today. Once a currency had been established, trade was able to expand rapidly and encompass many more areas. Since then, Forex trading has evolved from being purely a method of exchanging goods to a market in and of itself. There have been a handful of significant changes that contributed to that evolution which has resulted in a world spanning system, encompassing many different types of traders and trading companies.
The beginnings of the modern Forex trading system can be seen as early as the years leading up to the First World War. At this point in time, most of the countries in the world based their currency off a gold standard. This allowed for relatively easy trade between countries since gold was available everywhere and could be traded universally. Unfortunately, the gold standard had some serious flaws. As a country gained economic power, it imported more and more goods, which resulted in a steady outflow of its gold. The shrinking gold supply resulted in a diminished money supply, which caused serious financial problems for the country. As their currency devalued, investors would buy more of it, replenishing the gold supply and repairing the economy. These boom and bust cycles were bad for a country's economical and emotional health. As there was more paper money printed without the gold to back it, countries were plagued with inflation and political instability.
The Forex market slowed significantly in 1931 due to the Great Depression and the cancellation of the gold standard. The United States was unable to participate as strongly with the crippling financial situation it was in compounded with the abandonment of the gold standard, making it much more difficult to trade currencies smoothly. At this time, the British dominated the market due to the power of their economy. However, this was largely changed in 1944 with the Bretton Woods conference after the British economy had been severely hurt by the war. The agreement resulted in the United States, France, and Britain decided that the best way to stabilize the world market was to connect the major currencies of the world to the American dollar. It also stipulated that when a currency deviated from the American dollar by too much, the country's central bank would correct it by either buying or selling the currency until it was back in line. Due to America's success after the war and the agreement, it became the biggest player in the Forex market.
Another very significant result of the Bretton Woods conference, in regards to Forex trading, was the creation of the International Monetary Fund. The point of the IMF was to promote international trade. It also helped out member states by giving loans with conditions intended to encourage the country to meet certain standards which would hopefully facilitate the repayment of the loan and prevent the circumstances that led to the financial difficulties.
The IMF hugely impacted Forex trading in 1978 by proposing that the currencies of the world be free-floating, meaning that their value would be based on supply and demand rather than any fixed value. This pretty much created the modern Forex market by allowing the values of currencies to shift quickly enough that it became possible to invest based on speculation of future values.
There were a few other smaller changes after that, but the next significant change wasn't until 1998 when the European Union introduced the Euro. With many European countries adopting it as their national currency, it had a large impact on the market. Today, almost four trillion dollars are exchanged every day on the Forex market.
Many different parties are involved in modern day Forex trading internationally. Some significant ones are banks, including central banks, and commercial companies. The largest investors are speculative hedge funds, which account for 70-90% of the transactions. Investment management firms also play a significant role, as do retail brokers. Introducing brokers introduce clients to the market, but don't handle the trades themselves. Remittances also play a noticeable role in the form of economic migrants sending money back to their family in their home country.
Forex trading is an incredibly large market that affects the lives of every person on the planet, although most of them don't even know what it is. It has evolved quite a bit since its inception, and now offers interesting investment opportunities for everyone ranging from individuals to entire governments. There are a huge number of people involved in the market, and it is continuing to grow and evolve to accommodate the world as both a method of balancing international currencies and also a market that provides countless people and firms the opportunity for profit.
