What is Forex?

What does Forex Stand for?

Forex stands for FOReign EXchange trading, or the practice of buying and selling currencies in order to profit from the exchange rate fluctuations that occur between these currencies at any particular time.

The basic principle is that a currency has a rate for which it can be exchanged with another currency. This rate is not fixed; rather it is described as floating because it fluctuates according to the market forces which are operational at any given time.

Forex trading is done on a rudimentary scale by offline currency exchangers. However, what they do is replicated on online currency platforms on a much larger scale, with turnover of more than $4 trillion per day. Such online trading is called spot forex trade.

History of Forex

bretton woodsHow did forex begin? The origins of the market can be traced to the Bretton-Woods Conference of 1944 which held in New Hampshire, United States.

In this conference, the major economic powers gathered to discuss the future of the global economy post World War 2. At this stage, defeat of the Nazi aggression was imminent as WWII was drawing to a close. However, the major players in Europe who had been fighting the Germans from the onset of this war had plunged all their resources into the war effort, effectively ruining their economies. The US had only been active in the war for about three years, and so was still economically unscathed in relative terms. Part of the outcome of this conference was to base global economic recovery around the US, using its currency as the standard. Thus a fixed currency regime set the global exchange rate at $US35 to an ounce of gold, and all other currencies were pegged to the USD.

By the late 1960s, the dynamics of global economics had changed. Europe was in recovery, and the US was heavily involved in Vietnam; a situation which could be likened to a WWI role reversal. By 1971, it was clear that the US Dollar could no longer be maintained at the fixed standard to an ounce of gold, and this regime was abandoned by the Nixon government, effectively allowing the value of the US Dollar to be determined by market forces in the currency trading markets. Other USD pegs unwound and began to trade freely. The era of forex trading was born. However this was only open to major corporations.

By 1994, advances in information and communication technology and the advent of the internet meant that almost anyone in the world could plug in to the global system of forex trading. This led to the deregulation of the forex market, allowing private participation. By the turn of the millennium, several retail forex brokerages had sprung up, allowing individual traders to actually trade forex from the comfort of their own homes.

Requirements for Forex Trading

1)    A currency cannot be traded in isolation, but must be exchanged for another currency, and then re-exchanged after some time to profit from the exchange if the exchange value is in the currency holder’s favour.

2)    You need a dealer/broker to facilitate the exchange in order to provide a fair and balanced exchange condition.

3)    You can only trade currencies whose value is subject to market forces, i.e. whose exchange rate is subject to forces of demand. If a currency’s exchange rate is fixed or is kept within a very tight range as a result of government policy, that currency cannot be traded for money.

Forex Trading Today: What You Need

To get into forex trading in 2014, these are the things that you will need:

1)    A forex trading account with a duly registered and regulated broker/dealer – compare all FX accounts here.

2)    Some money which will constitute the account trading capital.

3)    A trade station, which could be a desktop, laptop or mobile device (smartphone or tablet device).

4)    An acceptable means of transaction. This could be a domiciliary bank account, Transaction here means depositing your account capital into the trading account, and withdrawing profits as well.

There are other things that the trader will need. What has been listed above are just the basics.

How to Obtain a Forex Trading Account

Obtaining a forex trading account is the gateway to trading the forex market. It is very simple to obtain one. All you need is to locate a regulated broker, fill an online account opening form and get the account verified by supplying a means of personal identification. (national ID card,  drivers’ license or international passport) along with a utility bill or bank statement to prove that you reside where you say you reside. This is one of the requirements of operating a forex account so as to cut down on the movement of illicit money through the system.

>> Make sure you compare all FX accounts here!

Account Funding

Once the account is open and verified, the next logical step is to transfer money into the trading account using any of the broker’s specified means of transaction.

The Process of Trading

Trading is the toughest part of the job. This is where you have to turn your venture into a profitable one using your account capital and your trading knowledge. Trading is done on the platforms provided by the broker, which connects to the global virtual market place. Access is provided through platforms built for desktops/laptops and mobile devices.

A sound knowledge of how the market operates is a key aspect of the trading process. However, this will not be discussed here. Rather, refer to other trade articles on Investoo.com to acquire the knowledge required.

Once profits are made, the trader is at liberty to use any transaction method permitted by the broker to withdraw these profits. Some of the popular methods used credit/debit cards, bank wire transfers, Skrill, etc.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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