Foreign Exchange Markets – A General Overview

In the beginning countries would trade with each other

using the barter system. If one nation needed lumber but

had cattle, they would trade one product for another. This

was pure trading. This type of economy has many

limitations, but served mankind well for many centuries.

However, nations quickly saw the benefit of having a

system of exchange, and while some cultures used pretty

rocks, or animal teeth, precious metals quickly became

established methods of exchange. God and silver were the

most popular. Initially gold and silver coins were used, and

in fact the name of the British standard currency, the

pound sterling, came from the Hasterling region where gold

coins were made, and originally meant coins of the

Hasterling’s. Up until World War I most nations had

central banks that supported the value of their currencies

and most used gold as the standard. Paper money was

printed and it legally could be exchanged for gold but this

did not often happen. Since it was rarely converted, some

banks and some nations believed they no longer needed to

keep reserves of gold in their vaults, as the US once did

with Fort Knox. Inflation then occurred.

Near the end of World War II a conference known as

Bretton woods had many nations reach an agreement on a

reserve currency system based on the US dollar. The World

Bank and other organizations agreed, and a fixed exchange

rate system was reached. The value of the dollar was fixed

on a certain amount of gold, and other currencies were

fixed on value to the dollar. Currency trading after this

however has evolved and currencies have grown in value,

and gone down in value, leading to fluctuation.

Today traders take advantage of the fluctuation in value

among currencies through the forex or foreign currency

markets. It is quite common to see a trader who suspects

that the value of the Euro will go up against the yen or the

dollar and follow the old axiom of “buy low and sell high.”

On of the ways this is done is through margin trading. With

margin trading a trader doesn’t have to have all the money

in an account that is being traded. If a trader has 10,000

and works with a one percent margin, he is able to trade

$100,000 in currency. This adds great leverage to the trade

and makes forex trading very attractive to many who are

looking for a large and quick return on their investments.

Forex traders are also attracted to the low costs associated

with trading since most trades are without commission.

The fact that there is a 24 hour trading cycle is also

attractive to many. Traders have opportunities for large

profit, but they also have risk inherent. An aggressive

trader may experience profit and loss swings of up to 30%

in a day. This can be 30% to the good, or to the bad, so

forex trading requires education and courage as well as

capital. However there are no daily limits and no

restrictions on trading hours other than the weekend when

markets are closed. For this reason there are always

opportunities. Money will always be made.

Much of the forex trading that occurs however is not with

individual investors or speculators. Many commercial

organizations have currency exposures that are created due

to import and export activities. This is reason enough for

many to engage in forex trading. However, financial

institutions remain the biggest players in the forex market.

Banks, brokers, mutual funds and other major financial

institutions are actively involved in forex trading.

Some nations in the past have complained about hedge

funds and other large institutions involved in forex trading,

saying that they have intentionally devalued their

currencies to make quick profits. George Soros, the famous

billionaire who is involved in politics, has been accused of

this practice by the government of Indonesia. Whether it is

true or not, and if true whether it should or should not be

done is not for this article. However, when institutions

control such large amounts of money, the chance of

manipulation does exist. As long as foreign currency is

traded, there will be such accusations. However, the forex

market remains a way to achieve substantial financial gain.

Posted in: