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Back to the Basics: The History of the Forex Market

Back to the Basics: The History of the Forex Market

When trading forex, we often forget how major the market that we are part of actually is. The foreign exchange market is a global, decentralized over-the-counter (OTC) market where institutional (large international banks like JP Morgan, Deutsche Bank, Citi, BS, Goldman Sachs) retail traders join to buy, sell and exchange currencies either at preset or current prices.

It is the largest by volume financial market globally and beyond important in the world of finance. It is the most traded market globally. The FX market operates on a 24/5 basis and in four sessions – trading starts in Australia and Asia, continues to Europe, and finishes in North America.

These seem like some raw facts that every trader knows. But what about where it all started? Let’s take a brief walk down memory lane to the birth of currency trading…

Currency Trading BC

Ancient Greeks and Egyptians were the first in history to be recorded exchanging currencies as far back as 3000 years ago. The Roman Empire had a centralized, government-run monopoly when it came to currency minting, similar to today’s central banks deciding on monetary policies.

Moneychangers were people who could help change money and would charge a commission fee for their service. Currency exchange was necessary in the ancient world as it allowed people to buy and sell food and other items. At the time, a coin’s value was measured by how much gold it held. Therefore, if a Greek coin held more gold than an Egyptian coin, money-changes would demand more Egyptian coins for a single Greek coin. Eventually, gold was exchanged for copper to create coins with a lower value.

Middle Ages

The first banks started opening during the 15th Century. The Medici family had to open banks in foreign locations for textile merchants to be able to exchange currencies. Trade was facilitated through a book called ‘nostro‘. There, bank workers would keep two columned entries showing foreign and local currency amounts. The first was called Monte dei Paschi and was established in Italy.

Further down the line, Amsterdam established the very first forex market in 1704, and transactions took place between the United Kingdom of England and the County of Holland.

The Gold Standard

In 1875, the Gold Standard was first introduced. The standard was created to stabilize and guarantee the value of a currency. In the past, the economic value of coins was based on a fixed quantity of gold. Countries were allowed to produce as much currency as was held in the gold reserves.

The Gold Start was abolished after World War I since countries had to print more money in order to finance the expenses of the war.

The Bretton Woods Agreement and The Plaza Accord

The Bretton Woods system involves monetary management systems that established special rules for financial and commercial relationships between large financial markets worldwide. The agreement allowed currencies to fluctuate within a range of ±1% from the currency’s par exchange rate. Eventually, Richard Nixon abolished the agreement, which resulted in a free-floating currency system.

The 90s became the time when the forex market truly started growing and developing. The Plaza Accord was established in order to depreciate the U.S dollar in relation to the German Deutschemark and the Japanese Yen. It was then that traders started realizing that the foreign exchange market had potential profit opportunities during price fluctuations.

The Forex Market Today

In the 21st Century, the forex market is the most liquid financial market in the world. There is a range of participants in this market that include:

  • Governments
  • Central banks
  • Commercial banks
  • Financial institutions
  • Speculators
  • Commercial organizations
  • Retail traders

Currencies are traded in lots: micro, mini and standard lots. A micro lot is worth 1000 units of a particular currency, while a mini lot is worth 10,000, and a standard lot is worth up to 100,000. The forex market is extremely attractive to traders because it is not as heavily regulated as the stock market. Since no central body governments control it entirely, currencies can be short-sold at any given time.

Over $5 trillion are traded on the forex market every single day, and while its future might be unpredictable, it is undoubtedly an everlasting financial market that is here to stay.

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