Forex is one of the names of the international foreign exchange market in which currencies are exchanged. You can also come across the terms FX Market or Foreign Exchange Market, which mean exactly the same thing. Forex is the most important market through which the global economy flows – governments, corporations, central banks and private investors take part in it.
When was Forex created?
The history of Forex dates back to the 40s of the twentieth century, when attention began to be paid to the instability of currencies. In the 19th century and earlier, the role of money in international trade was played by precious metals, and above all – gold. With the industrial revolution and the development of the economy, countries began to arbitrarily set the exchange rate of their currency against gold, which led to a mess in the currency market.
In 1944, the so-called Bretton Woods Conference was convened and talks on the creation of a stable monetary system were inaugurated. The agreement, signed by representatives of 44 countries, stipulated that:
- the World Bank and the International Monetary Fund will be established,
- the US dollar is the central currency against which the value of other currencies will be determined,
- the only currency convertible into gold will be the dollar,
- exchange rates will be relatively constant.
The conditions agreed during the conference worked quite well for some time, but the post-war migration of capital destabilized the market again. Therefore, in the early 1970s, it was decided to suspend the convertibility of the dollar into gold.
This is when Forex was born as we know it today, where exchange rates depend on supply and demand. The term Forex includes the purchase, sale and exchange of currencies. Of course, this definition is very general, because effective trading on Forex requires knowledge of the mechanism of this market.
What is Forex all about?
FX Market is a decentralized market, i.e. it does not have a physical location. Trading is carried out using a computer network connecting participants (traders, brokers). Forex is open 5 days a week (Monday to Friday) 24 hours a day. Every day, stock exchanges in large cities around the world close and open in a “tab” system. FX Market’s most important markets include London, New York, Sydney and Tokyo.
With round-the-clock operations, banks and investors from all continents in the world can trade currencies non-stop. It is estimated that every day on Forex, traders trade currencies equivalent to USD 5 trillion. Most traders are speculators, which are people who buy currencies only to sell them at a higher price.
Is it possible to make money on Fotex?
FX Market is a very liquid and dynamic market, which is why it is liked by investors. By adopting the right strategy, you can make money on Forex both on increases and decreases in exchange rates. Remember that with every opportunity to make money on Forex, there is a risk of loss.
Currency pairs
The essence of Forex trading is trading currency pairs. A currency pair is defined as two currencies that represent the value of one currency against another. The first currency is called the base currency, and the second – the quote currency. When you sell one currency – you buy the other currency of the pair and vice versa.
The price shows how much you need to pay to buy one unit of the base currency in the quote currency. The easiest way to illustrate this is in an example: if we see that the EURUSD exchange rate is 1.12345, it means that 1 euro is worth 1.12345 dollars. In other words, for 1 euro we will buy 1.12345 dollars.
All currency pairs have a Bid and Ask price. The Bid price is the price at which a trader sells a currency pair, and the Ask price is the buy price. From the broker’s point of view – at the Bid price he buys the currency pair, and at the Ask price – he sells.
The difference between the Bid and Ask price is called the spread. The value of the spread is expressed in pips, i.e. units measuring how much the exchange rate of a given currency pair has changed. The spread is not difficult to calculate, knowing the Bid and Ask price.
Let’s consider the EURUSD currency pair and prices:
- Bid = 1.7722
- Ask = 1.7725
- Spread = Ask price – Bid price
- Spread = 1.7725 – 1.7722 = 0.0003
Thus, in the situation cited, the spread is 3 pips.
With major currency pairs (e.g. EURUSD) the spread is very low (1-3 pips), larger differences occur if we are talking about less popular pairs (e.g. EURPLN). The size of the trader’s contribution also affects the size of the spread – the higher the contribution, the lower the spread. Brokers offer both fixed and variable spreads, the latter being conditioned by market factors.
Beginner traders often focus on investing itself, forgetting about the spread. And this is the broker’s earnings, and the cost for the trader, so it should always be taken into account when planning an investment strategy.
How to start trading Forex?
Now that we know what Forex is and what investing in this market is all about, we will explain how to start playing Forex. Let’s start by determining the minimum amount you should have to start investing. People who are just thinking about making a profit from currency trading often assume that they need an exorbitantly high contribution. This is not true – the smallest deposits with brokers are the equivalent of several dozen dollars, and investing can be supported by an instrument called leverage, but this will be discussed later.
It is important to choose a reliable broker. In Poland, brokerage activities are subject to the Office of the Polish Financial Supervision Authority.
How to create an account with a Forex broker?
The first step to investing in currencies is to open a trading account with a broker. Registration consists in filling out a form, where, in addition to standard data (name and surname, address, PESEL number, etc.), you need to provide information about the financial situation of the future trader. The broker will ask you to upload documents (e.g., proof of identity) and create an account after positive verification. From this point on, the trader can fund his account and start trading.
For beginners in the Forex market, the important information is that most brokers allow you to open a demo account. A demo account allows you to trade with virtual money, i.e. without incurring financial risk. With the help of a demo account, the investor gets acquainted with the trading platform, tests his strategy on real conditions and learns how the currency trading market works.
Leverage is an instrument that allows a trader to trade with more capital than the one physically held in the trading account. The capital is borrowed from the broker, who sets its leverage. For example, if a broker allows trading with a leverage of 1:20, it means that with 1,000 USD on the account, we can have 20,000 USD.