Let's Talk About Forex

Gaurav Learns What Forex Is in General

The next day when we met I decided to tell my friend about how Forex market was formed, what it is in general and who the main participants of that market are.

-I will now tell you how the Forex (Foreign Exchange) market was formed. Before 1970s the price of a currency was determined by the gold reserve of that country. Each currency had its equivalent expressed in ounces of gold. But soon everything changed. The fluctuating rates came to replace the gold standard. So this is how international Forex market was formed.

- What are fluctuating rates, Manoj?

-Fluctuating rates are the capability of the currency value to change freely depending on the supply and demand for that currency.

-Ok, clear. So I cannot understand how currencies are traded.

-Everything is simple, Gaurav. In Forex market a definite amount of one currency is sold or bought by a definite number of another currency. To make it clearer to you just imagine that one currency is the product, another is the currency with which you sell or buy the product. And you gain profit from trades thanks to floating currency rates.

- Ok, so for example if I trade with EURUSD it means that EUR is the product and USD is the currency, right?

- Yes, you are quite right, my friend. Let’s continue. So what is the advantage of this market you may ask. Imagine a market where you can buy or sell any moment you like; Forex market is open 5 days 24 hours a week. You can trade wherever you want due to online trading; a computer or mobile with internet connection and your trading becomes possible from any corner of the world. What is important for me is that in Forex market you do not have any boss, actually you yourself are your boss. In this sphere you are completely independent, there aren’t even colleagues, accordingly no competition exists.

- Great, so anyone can be involved in this market?

- Actually till 1990s only big financial institutions and banks could participate in Forex market. Forex trading was realized with several million U.S. dollars. In future due to brokerage companies Forex trading became possible for individuals as well. Thanks to margin trading one can trade with 100 000 dollars possessing just 1000 dollars, thus risking his own money. I will tell you about margin trading with more details later. And also remember that there is no international Forex company. Forex is realized due to brokerage companies. At present there are an unlimited number of brokers all over the world, offering their own unique services.

- Yes, my friend you really provided me with valuable information.

- This is only the beginning, Gaurav. Next time we will go deeper into this world.