Also know as FX, the Forex market is the contraction of Foreign Exchange, namely a global marketplace for exchanging national currencies.
One of the oldest marketplaces in the world, the Forex is also the largest in terms of trading volume, liquidity, and value, with an average of $6.6 trillion traded on the market every day. It’s also the only financial market to operate 24/7. Yes, like a 7-Eleven, and absolutely not like a 7-Eleven.
The history of ForEx
The maniacs will come back to the Babylonian period to unearth the ancestor of Forex. If we can’t deny that trading currencies and money is one of the oldest activities in the world (after the trade of goods maybe), still, we can consider that the modern foreign exchange took its sources in 1880, the year the Gold Standard began.
The Bretton Woods Accords (1944) and later the start of the Free-Floating System in 1971 shaped the Forex market as we know it today, with the majority of its activities (79%) facilitated in five major financial hubs, among which London remains the largest fx trading center – 43% of all forex trading.
By its geographical dispersion, its uninterrupted operations, and its huge trading volume, the Forex market is today one of the most fascinating financial construction in the world. But how does it work, by the way?
How does work the Forex?
Simply put, currencies are always traded against each other as exchange rate pairs, which makes a lot of sense. For example, the most well-known currency pair will be the one used for trading Euro against the U.S. dollar and will be written EUR/USD.
The global forex market is composed of more than 170 different currencies, divided into 3 levels of trade:
# The major currency pairs, very popular with their high liquidity, 7 pairs accounting for 68% of global foreign exchange transactions, all involving the U.S. dollar.
# The minor currency pairs, also called “crosses”, with less liquidity – but also less trading costs. EUR/GBP or GBP/JPY are some good examples of successful crosses.
# The exotic currency pairs, such as AUD/SEK (Australian Dollar/Swedish Krona), represent an opportunity to diversify your trading with a higher level of interest rate.
If you understood that the United States Dollar is predominant among the Forex trades (USD is one side of 88% of transactions), you will be surprised to see that actually only a few American retailers are participating in the Forex market.
Who trades on Forex?
Actually, retail forex trading only accounts for a little bit over 5% of the entire Forex market, where we find mainly institutions such as central banks, hedge funds, and multinational corporations. But even if the foreign exchange market is divided into levels of access, it doesn’t mean that you can’t enter the race.
The first thing will be to check if you’re a woman since female forex traders tend to outperform male traders by 1.8%. Joking aside, whatever your gender is, you will need a proper strategy to start trading on Forex markets. Of course, we don’t have the ultimate recipe, but here are a few tips for you:
# Opt for a scalping strategy, focused on smaller market movements and quickness, opening a large number of trades in a bid to bring small profits per each. This strategy is very popular in Forex due to its particular volatility.
# Choose a day-trading strategy while checking scrupulously the news. More than any other market, Forex is very sensitive to scheduled events like elections or economic announcements.
# In addition to the limit set on each position, you can also set a daily risk limit in order to protect your account and capital. 3% is generally considered a safe number.
You can also read our blog article about the 10 myths of Forex.