Currency Trading
History of forex market
Development of the international currency market:
The evolution of the foreign exchange market in recent decades goes through many stages in order to become the main engine of the contemporary global economy. Every day currencies are traded in billions of dollars on the world financial markets, thus enabling global trade and investment. This material is intended to provide the background to current developments in the international currency markets, with particular emphasis on international agreements and the impact of technology on business, which takes place 24 hours a day.

Between the First and Second World War, currencies were subject to the system of fixed exchange rates based on gold and silver standards. This period is known as the era of convertibility. Governments backed currency issued by them with a specific amount of gold or silver. The dominant world currency at the time was sterling and the dollar took on the role of the next most important currency. The end of convertibility came around 1929, at the beginning of the Great Depression. During World War II the foreign exchange market virtually ceased to exist.

The Bretton Woods Agreement of 1944: – Introduced the nominal system based on the exchange standard of gold. – Established the International Monetary Fund (IMF) and International Bank for Reconstruction and Development (World Bank). – USD replaced the British pound as the dominant currency on the market.

Clearing arrangements: – Multilateral agreement on compensation in 1947 – European Payments Union (EPU) 1950-1958 – European Monetary Agreement (EMA) 1958-1973

The Abandonment of the Bretton Woods Agreement leads to: – Formation of the Gold Pool in 1961 (to 1968) – Introduction of Special Drawing Rights (SDR) in 1969 – Strong currencies float more freely.

The Smithsonian Agreement of 1971
This agreement includes a 10 percent devaluation of the dollar and a further increase of other currencies, through an increase in the official price of gold to $28 an ounce. Greater flexibility was possible after an expansion by 2.25% of the permitted fluctuation margins of the new central rates of currencies against the dollar.

The Snake 1972:
Due to Germany's skepticism regarding the Smithsonian Agreement, European currencies change in a narrow range against each other and have a floating exchange rate against the dollar, thus creating a mini system.

The UK decision to join the Snake in May 1972 encouraged other countries to free-float their currencies against the dollar, rather than adhere to certain tolerance limits imposed by the Smithsonian Agreement.

Thus the Snake successfully replaces the Smithsonian Agreement. In fact England was forced to withdraw from the Snake after only seven weeks as a result of a speculative attack against the British pound.

OPEC Oil Crisis of 1973-74:
In response to the high inflation caused by the oil crisis, countries begin to set targets related to the increase in the money supply, resulting in increased interest rates. These changes in interest rates lead to greater movement of short-term capital between countries in search of higher interest rates and thus reinforcing a floating rate.

Goals of the European Monetary System (EMS) of 1979: – To contribute to better economic integration and stability among member states of the EU. – To introduce a system of managed exchange rate with intervention of + / - 2.25% from central rates for most currencies, i.e. Mechanism to control exchange rates. – To establish the ECU as the main currency in the EU. – Parity network is the cornerstone of the control mechanism of exchange rates. Bilateral central rates for each currency are at the core of the network.

European Economic and Monetary Union (EMU) 1990-2002: The creation of the European Economic and Monetary Union (EMU) is a process involving three stages from 1990 to 2002. It was created to introduce:

– Circulation of a single currency among member states of the European Union. – Creating a single European Central Bank (ECB). – Common monetary policy between EU member states.

– Exchange rates between EU member states are fixed on 1 January 1999 and in January 2002 the Euro was put into circulation.

The Goals of the European Economic and Monetary Union are:

– More efficient single market. – More stable economic environment. – Increased international monetary stability. – Further political integration within the EU.

Technological revolution: Greater speed and efficiency of communication is a result of the technological revolution. Dealers are able to expand their operations, thanks to computerized cash payments and information systems. Technological advances led to more speculation and volatility. Other innovations include:

– Authorities of the countries in the G7 try to maintain exchange rates within certain limits or reference ranges. – The Plaza Accord (1985) - In September 1985, the finance ministers and central bank governors of the member countries of the G5 (U.S., UK, Germany, France and Japan) held a meeting in New York, at the Hotel Plaza, on which they agreed to cooperate to encourage systematic improvement the major currencies against the U.S. Dollar. – The Louvre Agreement (1987) - In February 1987 the member states of the G6 (G5 with Italy) agreed to maintain their currencies at appropriate levels and promised to cooperate to foster stability of exchange rates around current levels. There is an unofficial exchange rate to be maintained within 5%.

– The international payments system is based on the exchange standard - International payment system is actually based on the dollar standard that exists, but is not officially recognized. Foreign central authorities hold reserves primarily in the form of dollars and use them to settle international debts. However, the dollar was no longer convertible into gold or tangible commodity. Thus, the purchasing value of the global dollar reserves depends on the state of the U.S. economy. It seems that this situation will continue until they are widely accepted alternative reserve assets.

What is Forex ?
Forex - originated from two words: Foreign and Exchange. By merging two words Foreign and Exchange the word Forex is created. Forex means foreign exchange of currencies on the decentralized market.

Forex is the world currency market, where speculative trading is done by retail and institutional parties through brokerage companies, with the aim of making profit and without any physical restrictions.

Forex market is the biggest market in the world with a daily turnover of 5 trillion dollars; it is open 5 days a week, 24 hours a day. Forex trading is available from any part of the world, making it the most attractive market for the investors of all types of investors.

Finzo Markets facilitates opportunity to private and corporate clients as well as other financial entities, to open trading account and to start trading within minutes.

Key advantages of forex market
  • High liquidity with constant demand and supply

  • Long working hours for speculative trading

  • Transparent market with no ability to manipulate price

  • Great liquidity which create constant opportunity

  • Numerous trading instruments to satisfy any investors demand

  • Ability to make profits from rising and/or falling prices

  • Ability to control risk and maximize potential profits

  • Accessible to nearly all interested parties

  • Low capital requirements

  • Major trading pairs

    Forex trading hours

    Country Market Opening Market Closing
    New York 08:00 EST (EDT) 17:00 EST (EDT)
    Tokyo 19:00 EST (EDT) 04:00 EST (EDT)
    Sydney 17:00 EST (EDT) 02:00 EST (EDT)
    London 03:00 EST (EDT) 12:00 EST (EDT)
    Forex market participants
    Retail clients
    Retail clients as well as investors and entrepreneurs that have export and import businesses, are able to perform forex trading with the aim to make profit.

    Financial companies and exchange houses
    These companies often require converting currency assets, when doing business abroad. Big companies convert large amount of currencies to support functionality of a day to day operations, this makes forex market a perfect tool to minimize liabilities and maximize profits. Large variety of trading instruments easily allows companies to achieve desired results.

    Investment funds and banks
    Investment banks and funds offer the services of currency trading, bank deposits, crediting and other financial services to their clients. And they are market participants themselves, where they speculate and manage risks.

    The government and central banks
    Government and central banks participate and use foreign exchange market to control, regulate local market and to balance economic situation of the country.

    How to perform profitable trading?
    When trading forex, all currencies are traded in pairs: EUR/USD, GBP/USD, AUD/USD and JPY/USD.

    Each currency value equates by price to other currency. When client buys a currency pair and market movement appreciates the currency pairs then client will make a profit. For example: if you purchase EUR/USD pair and aim to making a profit, market will need to move in your favor and appreciate Euros to Dollars, thus with such market behavior client will earn a profit.
    Why trade Forex ?
    The foreign exchange market (Forex, FX, or currency market) is a global decentralized market for the trading of currencies. The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends.
    There are many advantages in trading Forex. Here are a few reason for why people trade Forex:

    1. Forex is the largest financial market in the world
    The Forex market is considered to be the largest financial market in the world. Because the currency markets are large and liquid, they are believed to be the most efficient financial markets. It is important to realize that the foreign exchange market is not a single exchange, but is constructed of a global network of computers that connects participants from all parts of the world. It has a huge trading volume representing the largest asset class in the world leading to high liquidity.

    2. Markets are open 24 hours a day, 5 days a week
    The Forex market has continuous operation: 24 hours a day except weekends.The Forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.

    3. Highest liquidity
    The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the Central Bank Survey coordinated by the Bank for International Settlements average daily turnover was $5.2 trillion in 2018

    4. High Leverage
    In Forex trading, a small margin deposit can control a much larger total contract value. For example, a Forex broker may offer leverage of 1:500, which means that a $100 dollar margin deposit would enable a trader to buy or sell $50000 worth of currencies. Similarly, with $500 dollars, one could trade with $250000 dollars and so on. Remember this high degree of leverage can lead to large gains as well as losses

    5. No additional commission and low trading cost
    Trading Forex has much lower transaction costs than other investment products. Most Forex accounts trade without a commission and there are no expensive exchange fees or data licenses. Traders just pay the spread (the difference between the buying price and the selling price) to enter the market. This spread can be wide and is a significant cost of trading which is always displayed on your trading screen.

    6. Ease of access
    The Forex market is the largest and most liquid market in the world, it has become one of the most popular markets to trade globally due to its ease of access and availability. Online Forex brokers give traders of all levels easy access to forex trading platforms, meaning that the world of online trading has never been more accessible.

    Forex trading instruments are comprised of what is called a Forex pair. To understand Forex trading ,unlike other financial assets such as stocks, commodities or bonds, Forex trading always involves the combination of two currencies.

    Let's look at a Forex Pair to better understand:
    The most commonly traded Forex pair is the EUR/USD (EUR is the Euro, & USD is the US Dollar)

    The EURUSD tracks the worth of €1 in Dollars. Therefore, if the EURUSD exchange rate is quoted at 1.30, that means that each €1 is worth $1.30. If the exchanged rate rises to 1.40, that will indicate that the Euro has strengthened against the Dollar, as €1 is now worth $1.40. The opposite is true if the EURUSD rate falls to 1.20.

    Traders of the EURUSD are actually trading the changes in the exchange rate between the Euro and Dollar. Therefore, if you bought the EURUSD and the Euro appreciated against the Dollar (the value of €1 rises in relation to the $) you will profit on the trade. If the Euro weakens against the Dollar, your position will be with a loss.

    What Causes Exchange Rates to Change
    Since Forex trading involves benefiting off of changes in the currency exchange rates, it is important to know why an exchange rate changes. The answer to this question is supply and demand. When there is more demand for one currency than another, it will cause the exchange rate values to change.

    For example, when the tragic earthquake and tsunami hit Japan, the value of the Japanese Yen rose against other major currencies. This was due to the fact that Japanese companies that had investments out of Japan had to quickly bring their money back into Japan to pay for repairs and insurance liabilities. These companies converted their foreign holding into Yen in the process. As a result, there was a sudden spike in demand for Japanese Yen. The demand caused Yen exchange rates to change rapidly as a result.

    The main causes of changes in supply and demand are due to changes in economic trends, geopolitical events, and changes to market sentiment. All most important events can be seen and followed on the economic calander

    • Economic Trends: When a country begins to show stronger than expected growth, it will often trigger increased investments in that country and raise currency demand. Such trends can last months or even multiple years and lead to one currency strengthening against another for a significant period of time

    • Geo-Political Events: Geo Political events can also affect currency exchange rates as investors may decide to quickly exit holdings in one country if they that their funds may become less safe.

    • Market Sentiment: If traders on an overall basis begin to take on additional risk, this will often create increased demand for so called "riskier currencies" which will cause exchanges rates to change.

    Basic Forex Terms
    Listed below are some of the most common key terms used in Forex trading:
    • Pip - A Pip is a Percentage in Point (PIP), sometimes also referred to as " a Point." It is equal to the minimum price increase of a Forex trading rate. The most common Pip is 0.0001 or 1/10000.

    • Ask Price - The asking price is the price you can buy a currency at. It is also the price which the Forex market is willing to sell the currency to you.

    • Bid price - The bid price is the price you can sell a currency at. The Forex market is willing to pay you this price for this particular currency.

    • Spreads - Spreads are the difference between bid price and ask price in Forex exchange.

    • Currency rate - This is the Rate at which one currency exchanges with another.

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