Introduction to the Forex Market

The Foreign Exchange market, also referred to as the "Forex" or "FX" market is the largest financial market in the world, with a daily average turnover of US$1.9 trillion — 30 times larger than the combined volume of all U.S. equity markets.

"Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation.

For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.

The FX market is considered an Over The Counter (OTC) or 'interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets.

More information

For more background about the Foreign Exchange market, review the Federal Reserve Banks' "All About the Foreign Exchange Markets in the United States".

History

The modern foreign exchange market (fx or forex) began to develop in 1973. However, money has been around in one form or another since the time of Pharaohs. The Babylonians are credited with the first use of paper bills and receipts, but Middle Eastern moneychangers were the first currency traders to exchange coins from one culture to another. During the middle ages, the need for another form of currency besides coins emerged as the method of choice. These paper bills represented transferable third-party payments of funds, making foreign currency exchange trading much easier for merchants and traders and causing these regional economies to flourish.

From the infantile stages of forex during the Middle Ages to WWI, the forex markets were relatively stable and without much speculative activity. After WWI, the forex markets became very volatile and speculative activity increased tenfold. Speculation in the forex market was not looked on as favorable by most institutions and the public in general. The Great Depression and the removal of the gold standard in 1931 created a serious lull in forex market activity. From 1931 until 1973, the forex market went through a series of changes. These changes greatly affected the global economies at the time and speculation in the forex markets during these times was little, if any.

Date	Event
1944	Bretton Woods Accord is established to help stabilize the global economy after World War II
1971	Smithsonian Agreement established to allow for greater fluctuation band for currencies
1972	European Joint Float established as the European community tried to move away from its dependency on the U.S. dollar
1973	Smithsonian Agreement and European Joint Float failed and signified the official switch to a free-floating system
1978	Free-floating system officially mandated by the IMF
1993	European Monetary System fails making way for a world-wide free-floating system
1997	Global Forex Trading begins offering services to customers as one of the first in the U.S.
2006	GFT Global Markets is established to offer forex trading, and derivatives trading, including spread bets and CFDs, to customers wordwide

The Bretton Woods Accord

The first major transformation, the Bretton Woods Accord, occurred near the end of World War II. The United States, Great Britain and France met at the United Nations Monetary and Financial Conference in Bretton Woods, N.H., to design a new global economic direction. The location was chosen because, at the time, the U.S. was the only country unscathed by war. Most of the major European countries were in shambles. Up until WWII, the British pound was the major currency by which most currencies were compared, but that changed when the Nazi campaign against Britain included a major counterfeiting effort against its currency. In fact, WWII vaulted the U.S. dollar, from a failed currency after the stock market crash of 1929 to benchmark currency, by which most other international currencies would become compared and valued. The Bretton Woods Accord was established to create a stable environment, leading to an onslaught of other global economies restoring themselves and their currencies. In fact, the Brettonn Woods Accord established the pegging of currencies and the International Monetary Fund (IMF) in hopes of stabilizing the global economic situation.

Major currencies were now pegged to the U.S. dollar, fluctuating by one percent on either side of the set standard against the dollar. When a currency's exchange rate would approach the limit on either side of this standard, the respective central bank would intervene to bring the exchange rate back into the accepted range. At the same time, the U.S. dollar was pegged to gold at a price of $35 per ounce, further bringing stability to other currencies and world forex situation.

The Bretton Woods Accord lasted until 1971. Ultimately, it failed, but it did accomplish what its charter set out to do, which was to reestablish economic stability in Europe and Japan. The major reason it failed was because it continued to use a set standard to fix a currency against a smaller market, such as gold.

The Beginning of the free-floating system

After the Bretton Woods Accord came the Smithsonian Agreement in December of 1971. This agreement was similar to the Bretton Woods Accord, but allowed for a greater fluctuation band for the currencies. In 1972, the European community tried to move away from its dependency on the dollar. The European Joint Float was established by West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. The agreement was similar to the Bretton Woods Accord, but allowed a greater range of fluctuation in the currency values.

Both agreements suffered mistakes similar to the Bretton Woods Accord and, in 1973, collapsed. The collapses signified the official switch to the free-floating system. This occurred by default, as there were no new agreements to take their place. Governments were now free to peg their currencies, semi-peg or allow them to freely float. In 1978, the free-floating system was officially mandated.

In a final effort to gain independence from the dollar, Europe created the European Monetary System in July of 1978. Like the previous agreements, it failed in 1993, but what followed was an evolution from a combination of the EMS and the Bretton Woods Accord.

Today, the major currencies, such as the U.S. dollar, Euro, British pound, Swiss franc and the Japanese yen, move independently from other currencies. The currencies are traded by anyone who wishes, including an influx of speculation by banks, hedge funds, brokerage houses and individuals. Only on occasion do some of the central banks intervene to move or attempt to move currencies to their desired levels. The underlying factor that drives today's forex markets, however, is supply and demand. The free-floating system is ideal for today's forex markets. The supply and demand of currencies are driven by three factors, including interest rates and interest rate differentials, commodities and global trade. The forex market is the prime market of the world by all which all others can be considered derivatives (like futures and options).

Forex market

Over the last three decades the foreign exchange market has become the world's largest financial market, with over US$2 trillion traded daily. Forex is part of the bank-to-bank currency market known as the 24-hour Interbank market. The Interbank market literally follows the sun around the world, moving from major banking centers of the United States to Australia, New Zealand to the Far East, to Europe then back to the United States.

Forex Market Summary of Benefits

– Forex is open 24 hours a day. – Forex is the most liquid market in the world. – Up to 400:1 leverage. Without appropriate use of risk management, a high degree of leverage can lead to large losses as well as gains. – No restrictions on shorting which allows you to enjoy trading opportunities during any market condition.

Until recently, the forex market wasn't for the average trader or individual speculator. With the large minimum transaction sizes and often-stringent financial requirements, banks, hedge funds, major currency dealers and the occasional high net-worth individual speculator were the principal participants. These large traders were able to take advantage of the many benefits offered by the forex market vs. other markets, including fantastic liquidity and the strong trending nature of the world's primary currency exchange rates.

GFT Gives You the Access and Resources to Trade Forex

As a primary market-maker in foreign currency trading, Global Forex Trading is able to offer smaller transactional sizes and allow traders of almost any size, including individual speculators or smaller companies, the opportunity to trade the same rates and price movements as the large players who once dominated the forex market. Currency trading is not conducted on a regulated exchange, and as a result there are associated risks with forex trading.

The forex market removes the traditional barriers that exist in other markets without restricting the forex traders' ability to make a trade at the right times.

Some examples include:

Other Markets	Forex Markets
Limited floor trading hours dictated by the time zone of the trading location, significantly restricting the number of hours a market is open and when it can be accessed.	The Forex market is open 24 hours a day, 5.5 days a week. Because of the decentralized clearing of trades and overlap of major markets in Asia, London and the United States, the market remains open and liquid throughout the day and overnight.
Threat of liquidity drying up after market hours or because many market participants decide to stay on the sidelines or move to more popular markets.	Most liquid market in the world eclipsing all others in comparison. Most transactions must continue, since currency exchange is a required mechanism needed to facilitate world commerce.
Traders are gouged with fees, such as commissions, clearing fees, exchange fees and government fees.	Commission-Free (GFT is compensated by revenues from its activities as a currency dealer, including proceeds from buying, selling, converting as well as holding currencies and interest on deposited funds and rollover fees.)
Large capital requirements, high margin rates, restrictions on shorting, very little autonomy.	One consistent margin rate 24 hours a day allows Forex traders to leverage their capital more efficiently with as high as 400-to-1 leverage. Without appropriate use of risk management, a high degree of leverage can lead to large losses as well as gains.
Short selling and stop order restrictions.	None.
Pattern daytraders subject to restrictions requiring account balances in excess of $50,000.	No restrictions. Very low account balances. Accounts opened with minimum deposits will be liquidated should they fall below GFT minimum margin requirement (see trading regulations for details).