What Is The Foreign Exchange Market

Foreign exchange – a term you probably only remember as a benefit of tourism back in social studies (🙋 90s kids). Did you know people actually make a full-time living from foreign exchange? Let me back it up a little. When you visit Zanzibar for your Easter holiday or that cousin of yours who went to Australia sorts you out, there is a transfer of not only money but currency too. At any given time there is a buying and selling price of one currency against another (the red and green blinking columns in your bank ). See that difference? If you can capitalize on it through selling or buying one currency with another then you can actually add your name to the hall of fame of online freelancers.

The Gold Standard and Bretton Woods

The famous site where the Bretton Woods currency exchange system was deliberated

“If you want to understand today, you must search yesterday, ” says Pearl Buck, an American writer, and novelist. This statement rings true for all genealogies of which forex is no exception. I can choose to bore you with the history of money that begins with barter trade, coins, and paper money but the gold standard System is a more compelling topic. The Spice Route, the Trans-Saharan trade route, and the Silk Road are some of the trade routes that influenced the world’s history. With this exchange, the need to develop a standard currency emerged and metals became the internationally accepted payment method. The Gold Standard System emerged from this era with countries agreeing to back up their printed money with a gold reserve.

Enter WWI and everyone needed to win the war leading to a surplus of printed money against the gold reserve. As a result, the Gold Standard System failed and the Bretton Woods system was born to replace the international currency exchange system by the Allied Nations. Based on the Bretton Woods conference, the USD became the convertibility standard and the only currency to be backed by gold worldwide explaining why it failed in 1971 under President Richard Nixon. The floating exchange rates then reigned the foreign exchange market.

The Current Foreign Exchange Market

Bullish and bearish Foreign Exchange market trends

Fast forward to 2018, the foreign exchange market has been populated by numerous brokers, banks, and retail traders who to some extent control the market. Previously, during the Bretton Woods system, for instance, Forex was for a handful of decisionmakers or the government. Until recently (from 2006) have retail traders been able to transact business in the currency exchange market. The floating exchange system is basically a price mechanism market; the supply and demand of a currency determine its price against another currency. This factor enables retail traders to observe and trade based on the trend.

The major currency pairs mostly have a floating exchange system while the exotic pairs sometimes use the fixed exchange system. Of course, if you have enough money, you can influence the market to your advantage. The environment of a country such as the political climate, natural calamities, and tribal clashes significantly affect the value of a currency. The effects of Brexit on the sterling pound or Kenya’s stock market crash when the Supreme Court nullified a presidential election are clear indicators of how fundamentalist forex traders make their profits.

The Future of Foreign Exchange from Facts

An upward trend depicting the past, present, and future of Forex

The currency exchange system has existed since civilization, way before the stock market. “Each one of you who crosses over to those already counted is to give half a shekel… an offering to the Lord,” Exodus 30:13. ” He scattered the coins of the money changers and overturned their tables.” John 2:15. Israelites above 20 were to offer shekels and the money changers were influencing the currency exchange made Jesus angry. The Byzantine government of the 4th century AD and Papyri (8 BC) in Ancient Egypt show evidence of currency exchange. The Medici family also had banks that exchanged currencies for merchants during the 15th century.

All of this historical data coupled with the Gold Standard System and Bretton Woods clearly illustrate that forex is here to stay. In fact, the Forex market transacts over 5.2 trillion USD on a daily basis, enough to pay off the debt of the world (lol). Yes, so cryptocurrencies may be the future but the skill to trade currencies and make a profit is an investment. Cocoa, gold, stock and with the mt5 platform you can even trade bitcoin against the USD.

Maybe forex is just not worth the hype, but so was PublicLikes and SportPesa and there are millionaires from them. Why forex you’ll ask, but why not. Disclaimer: just like all legitimate investment opportunities, if not handled correctly forex can swindle away your wealth in a jiffy. However, risk aversion is one of the basic lessons before trading so it is really safer.

 

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