Chapter 1: Introduction to Forex

Until the early 1970s, the price of a country’s currency in the world was determined by that country’s gold reserve – the world had a gold standard. Each currency had its equivalent in ounces of gold. Soon everything changed, the gold standard was abandoned and floating exchange rates were introduced – the price of a currency became determined solely by its supply and demand. This is how the international currency market Forex was formed.

In Forex, a unit of currency from one country is traded for a certain number of units of currency from another country. Since it is quite difficult to imagine how money can be traded for money, you can think of a currency as a security that entitles you to a share in the economy of its corresponding country. For this reason, the health of a country’s economy is determined by the stability of its currency. So, when we trade in Forex, we are trading bits and pieces of the economies of countries around the world.

What makes Forex unique? Imagine a market where you can buy or sell anything you want at any minute. You bring goods to such a market and at the same second you find a buyer for it at a mutually beneficial price. These are the characteristics of an ideal highly liquid market. Liquidity means the ability to sell or buy goods at any moment at a mutually beneficial price, or, as they say in textbooks, to exchange goods for money and money for goods. What is necessary for an ideal market? First, the absence of monopoly and fair competition. Second, a huge number of participants. Thirdly, round-the-clock operation. These are the main requirements for an ideal market, if you want, you can count a dozen more, derive a system with a hundred equations and defend a doctoral dissertation on this topic. But we will not go away from the topic, at the moment it is only important to realize that Forex is the most highly liquid market in the world!

Forex turnover is more than 3 trillion (!) US dollars a day. Anyone can become a participant in Forex. All that is necessary for this is a certain amount of starting capital (we will talk more about this later) and access to the Internet. With such a huge number of participants, none of them (even central banks of highly developed countries of the world) can single-handedly influence the supply and demand of a certain currency for a long time. All processes affecting supply and demand are natural processes of life in the economies of different countries. There are both regularities and surprises in these processes. Learning to understand and timely react to changes in these processes is an important part of Forex trading, called fundamental analysis. There is also technical analysis, but we will talk about it all later, and now we will not get ahead of ourselves.

An interesting fact is that until the late 1990s, only large financial institutions and banks traded on Forex. Trading on the market required capital of several tens of millions of US dollars, and it was for such sums that buy/sell contracts were concluded between its participants. With the development of the Internet everything changed, there appeared exchange intermediaries providing their services to individuals. Using the advantages of margin trading, individuals with a capital of several thousand dollars can conclude contracts of purchase/sale of currency for hundreds of thousands of dollars, risking only their capital. The principle of margin trading is the basis of Forex trading by individuals and will be discussed in detail later.

Forex has no physical location or central exchange office. The forex trading platform is the whole world! Forex trading does not stop for a minute. In calendar days it starts in the Far East in Wellington (New Zealand), passing successively time zones – in Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt am Main, Zurich, London and ending the day in New York and Los Angeles. Of the cities listed above, Tokyo (Japan), London (UK) and New York (USA) are the most important in terms of forex. Depending on the time of day, one currency can be traded more actively on Forex than another – this is explained by the operating hours of the largest financial centers of the respective countries.

Let’s summarize the introductory part. The international currency market Forex has a number of advantages in comparison with other markets, for example, with stock markets (stocks are traded on stock markets) – there is no need to stay awake at night in the Far East of Russia, waiting for the stock market to close in Moscow. Forex works around the clock and is the most highly liquid market in the world. The spread of the Internet has led to the emergence of exchange intermediaries that provide individuals with the opportunity to work and earn on Forex. It so happens that the competition among such exchange intermediaries on the Internet is great, which has led to quite favorable offers of Forex trading for individuals. In the introductory part we intentionally did not use many special terms and concepts applied to Forex in order not to overload the reader with a large amount of information at once. In the following sections of the site the picture of Forex trading will become clearer and clearer.