The foreign exchange (forex) is the most traded and largest financial market in the world, and sees a daily average trading volume of around $5 trillion.
This makes it a particularly volatile market, which can lead to some profitable possibilities alongside a high level of risk.
There is no central exchange for forex, unlike other traditional markets, and currency can be traded through financial derivatives, such as contracts for difference (CFD). The meaning of CFD trading is the speculation of prices of a financial instrument, without owning the underlying asset. In terms of forex, the profit or loss is calculated from the opening and closing of the contract in relation to the prices of a pair of currencies.
With different products available to trade forex in modern times, let’s take a look back its history, and how it has changed through the years.
Around 2500 years ago, coins were fashioned out of silver and gold, and used as a form of currency. Ancient Greece and Egypt used these coins to buy goods and commodities, and the first form of exchange was born. The value that the coin represented was determined by its size and weight.
In the Middle Ages, copper was used as another precious metal to create coins, and with it introduced a lower valued currency. This improved the transactions that took place, as prices and payments could be differentiated even further.
The Gold Standard
Although gold was commonly accepted as a medium of exchange, the coins were heavy, and the reliance on the raw material fluctuated. Therefore, in the 1800s, countries around the world implemented the Gold Standard. This created a system that tied the currency’s value directly to gold, and meant that the nation’s government could redeem paper money for its value in gold.
During this time, the forex market was backed by the Gold Standard system, and continued to do so into the early 1900s. Different countries could therefore trade with each other, as the various currencies could be converted into gold.
For Britain, the exchange rate for the pound (GBP) was fixed to that of its relative value in gold, with an ounce of gold worth £4.247. However, this system meant that there was a lack of volatility in the exchange of currencies, as well as a low inflation rate. World War I was also a factor in the dispersion of the Gold Standard, as European countries had to abandon the system in order to provide financial support for the war.
The Bretton Woods System
The forex market was transformed with the introduction of the Bretton Woods Agreement which established a brand-new monetary system. After the stock market crash in the US and the economic collapse at the end of the 1920s, followed by World War II, leaders around the world met at Bretton Woods, New Hampshire to agree upon a fixed exchange rate between their currencies and the dollar.
This was the monetary model used for currencies globally until 1971, and meant that all currencies were valued against the US dollar (USD), with a fixed rate of $35 convertible for every ounce of gold. The USD was chosen as the currency to set against all others, as at the time, US held the most gold reserves in the world. This aimed to stabilise the environment for global economic recovery.
The Free-Flowing Currency Market
The Bretton Woods Agreement was abandoned in the early ’70s, as the USD circulation increased with government lending and spending, and there wasn’t enough gold to keep up with the demand. In its place, a free-flowing currency market was adopted. This means that national currencies and government-issued money were no longer tied to the value of gold, and countries are permitted to decide their own exchange rate schemes.
The forex market of today and the future
The invention of the internet was a pinnacle moment in the evolution of the forex market, as currency prices and exchanges that formally took a team of traders, brokers, and telephone interactions, were now all available at the click of a button. Online forex trading also opened up the possibility to trade in exotic markets and currency pairs.
An important part of forex trading today, which is sure to thrive in the future, is the increase in usage of mobile trading platforms. As a market that can change in an instant, with huge trading volumes and affected by a range of factors, mobile-trading allows investors to access their account quickly and act accordingly. With a vast history and a bright future ahead, it it’s clear that the foreign exchange will continue to be the largest financial market in the world.