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| Forex Basics (1) |
What is forex?
In general, forex trading, foreign exchange trading, or FX market is the exchange of a country's currency for Another country at the same time.
The foreign exchange market (Forex) is the largest financial market and the most liquid financial market. Daily forex 5 trillion US dollars.
Unlike other financial markets that are centralized in their trading positions, the forex market does not have a central place where there is trading. The forex is purely a global electronic network consisting of banks, financial institutions, brokers, and Finally, individuals who trade in foreign currencies. And all the aforementioned parties are buying and selling currencies.
Trading activity in this decentralized market occurs 24 hours a day. We believe that this market responds to what is happening
In financial centers around the world when they open or close. Therefore, we will find people who buy and sell currencies, and foreign currency around the world throughout the five-week days in which other financial markets operate, and around the clock. This made the foreign exchange market the most active and the most liquid among all the global markets.
Traditionally, the volume of foreign exchange trading was large among banking sector institutions. As the purpose of currency trading was This sector, it is divided into two types: commercial and investment purposes.
However, the situation has changed since 1971 That year, the trading rates were allowed to float freely, and the trading volume increased significantly. At the present time, we see All those who are involved in the trading market use the foreign exchange market for several purposes, including speculation, and payment.
Goods and Services, transactions in financial assets, or they use the forex market to reduce the risk of currency movements, The risk is reduced by hedging risks in other markets; Among those who resort to the forex market are exporters, importers, international portfolio managers, multinational companies, speculators, The day trader, the long-term stockholders, and the holders of protective portfolios.
However, it is worth mentioning, that approx 90% of the daily trading volume in the forex market is the result of speculative trading.
Forex history
In the past, people expressed the value of goods and services with the value of other goods, and this system of exchange was called It is made of either gold or silver. At the time, the barter system. The first signs that humans used were With a little progress in time, specifically in the middle ages, humans began to use securities, and these were The securities carry the trading value, for the security is the one that carries the value of “what a person owes to another counterparty.” good or service.” However, the process of foreign exchange trading in itself is the most recent form of trading in financial markets,
We find that during the last century, the foreign exchange market has undergone very huge transformations.
Before the Second World War, the central banks worked to strengthen the currency of their countries by providing a golden cover for the currency. In the sense that it is possible to convert paper currency into gold if requested by the bank.
It was unlikely That all holders of securities require the transfer of their gold at the same time, so the banks needed to maintain a number of Specific amounts of gold, in order to facilitate the transfer of paper currency to gold for persons wishing to do so (which is known as the reserve gold). In this way, the number of securities exceeded the number of gold reserves held by the central banks.
As a result of this, The matter is, with low levels of confidence in times of crisis, banks often suffer from “citizens fleeing to them.” To exchange their securities for gold.” the demand would increase, especially if gold was not readily available. Sufficient with the bank.
The foreign exchange market provided a set of rules to control it, and the aim was to control it. In the year 1944, BC.
It was also the intention of those in charge of the financial system, that those rules work It also has to shape the structure of the global economic system in a way that allows the volatile foreign exchange markets to gain stability.
In July 1944, the world was on the cusp of the end of World War II, on that date the leaders of the Allied countries met (America, Great Britain, and France) The meeting was held in Bretton Woods, New Hampshire, under the title “The Monetary Conference and money for the United Nations. The Allies at that meeting shaped the foreign securities system of a post-war world. the war.
The Bretton Woods Conference defined a system of fixing the price of currencies at a single currency rate and established the International Monetary Fund. Under the agreement, the price of an ounce of gold was fixed at 35 US dollars, and the price of other currencies was fixed in accordance with the agreement the price of the dollar.
However, fluctuation became sharp among the economies of a single country during the 1960s. At that time, I became It is difficult to maintain the system of fixing the currency rate to the rate of another currency.
The Bretton Woods system collapsed in 1971 when US President Nixon suspended the standards for converting the dollar into he went. As a result of the growing trade deficit and government budget deficit, the US dollar has lost its attractiveness as an international currency. alone. Europe tried to get rid of its dependence on the dollar during the 1970s. In 1979, some countries held In the European Common Flotation Agreement, these countries were: West Germany, France, Italy, the Netherlands, Belgium, and Luxembourg.
mother of the euro
The European quest for currency stability continued until the European countries signed, a 1992, treaty by Maastricht. The goal of that treaty went beyond just stabilizing the price of foreign currencies, but extended to replacing a large number of foreign currencies. Currencies of European countries, and by 2002 the euro had become the currency of many European countries.
Floating currency exchange systems
Under the floating exchange system, the value of currencies is not tied to gold, but the value of currencies is determined by other currencies.
The world needed a floating exchange system because, at the beginning of the twentieth century, two world wars caused: social, accelerating inflation, and also led to the destruction of the financial system that made the provision of a golden cover for currencies possible.
The period between the two world wars also witnessed some countries temporarily abandoning the golden cover and seeking to Float their labor exchange system. This floating exchange system continued, to a point where currencies crossed the currency fluctuation line.
In the Bretton Woods system, the banks of the countries that adopted that system were unable to absorb that transgression.
In addition to these turbulent economic conditions, At this point, these countries were allowed to adopt floating exchange rates for currencies. and The turmoil of the Vietnam War, was when the central banks finally decided to convert their dollars into gold. and caused you Moves into losses in gold, and in order for US President Nixon to halt losses in gold, in 1971 he halted the conversion of Dollars turned into gold, in what was known as “closing the gold window.” And countries officially stopped working under the Bretton Woods system. The currency was fixed in 1974. The Jamaica Agreement was later concluded, which gave countries freedom to choose the exchange system that they desire it.
What type of assets are traded in the forex market?
Forex trading is the act of buying one currency and selling another at the same time. Or buy and sell someone else's money in countries, as opposed to another country's money. Currencies are traded through Banks, brokers, or dealers. and be Trading in pairs, for example, EUR, USD (EUR/USD), USD Japanese yen (US dollar / Japanese yen).
There can be some confusion while trading forex because you are not buying any physical asset when you Buying a currency. Imagine it as if you were buying one of the shares of a country. For example, if you were to buy With the US dollar, you are buying a share of the US economy. This is because the currency rate is a reflection Direct view of what the market believes about the currency and the future of the US economy. So, the exchange rate for Other currencies, is a reflection of the state of the country's economy as a whole, compared to the economies of other countries.
The currency rate is determined by several factors: political stability, inflation, and the interest rate, all of which are factors that determine The price of the currency. However, the most important factor in determining a country's currency rate is the economic and political situation. of the country issuing the currency. Some governments try in certain cases to control the price of their currency by buying these In this case, the state’s purposes varied, including trying to raise the price of the currency by flooding the market, or reducing its price. However, it is impossible for any single force to control the market for any period of time. Because of the huge trading volume in the forex market. In the long run, market forces impose their interactions, which makes the currency the most open, and provides the greatest investment opportunities.
Unlike the financial markets, the forex market does not have a physical location or a central trading platform. ) That is, the small daily volume of trading that takes place on the Chicago Mercantile Exchange). A market outside the stock exchange, or a market between banks, because the entire market is transacted within a network of banks and brokers, continuously 24 hours a day. (over-the-counter market, which means you have to trade Currency with a certain bank or broker when you are trying to buy and sell currency.
Traded currencies
The US dollar is the most widely traded currency at the global level. America accounts for 90% of forex transactions. The US dollar and the euro are the most important currencies in the forex market. he comes In second place is the euro, making up 35%, while only 3% of commercial transactions in the forex market do not. It contains the euro or the US dollar.
USD - EUR - JPY - GBP - CHF - CAD - AUD - NZD