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Chapter 1: Introduction to Forex
Before the 1970s, the value of a country's currency was determined by its gold reserves, operating under the gold standard. Each currency had a specific equivalent expressed in ounces of gold. However, this changed with the abandonment of the gold standard and the introduction of floating exchange rates. Currency prices started being determined solely by supply and demand. This led to the emergence of the international currency market known as Forex.
In Forex, one country's currency is traded for a specific amount of another country's currency. To simplify the concept of trading money for money, consider currency as a valuable asset representing a share in the corresponding country's economy. Thus, the stability of a country's currency directly relates to the health of its economy. When trading on Forex, we engage in transactions involving fractions of the world's economies.
What makes Forex unique? Imagine a market where you can buy or sell anything you desire at any given moment. You bring your goods to this market, and instantly find a buyer at a mutually beneficial price. These are the characteristics of an ideal highly liquid market. Liquidity precisely refers to the ability to buy or sell goods at a mutually beneficial price at any moment, or as textbooks describe it, to exchange goods for money and money for goods. What is necessary for an ideal market? Firstly, the absence of monopolies and fair competition. Secondly, a vast number of participants. Thirdly, round-the-clock operation. These are the primary requirements for an ideal market, and if desired, one could enumerate a dozen more, develop a system with a hundred equations, and defend a doctoral dissertation on this topic. However, let's not digress from the subject. What matters now is understanding that Forex is the most highly liquid market in the world!
Forex turnover amounts to over 3 trillion (!) US dollars per day. Anyone can become a participant in Forex. All that is required is a certain amount of starting capital (which we will discuss later) and internet access. With such a large number of participants, none of them (even the central banks of highly developed countries) can unilaterally influence the supply and demand of a specific currency for an extended period. All processes affecting supply and demand are natural aspects of the economies of different countries. These processes exhibit both regularities and unexpected occurrences. Learning to understand and timely react to changes in these processes is an essential part of trading in Forex, known as fundamental analysis. There is also technical analysis, but we will discuss all of these aspects later. For now, let'snotgetaheadofourselves.
participants. However, with the development of the Internet, everything changed. Exchange brokers emerged, providing their services to individual traders. By utilizing the advantages of margin trading, individuals with capital in the thousands of US dollars can enter into contracts for buying/selling currencies worth hundreds of thousands of US dollars, risking only their own capital. The principle of margin trading forms the basis of private individuals' trading on the Forex market and will be discussed in detail later.
Forex does not have a physical location or central exchange. The trading platform for Forex is the entire world! Forex trading operates continuously without a pause. It starts in Wellington (New Zealand) in the Far East and progresses through time zones, including Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt, Zurich, London, and finishes the day in New York and Los Angeles. Among these cities, Tokyo (Japan), London (United Kingdom), and New York (USA) hold the most significance in relation to Forex. Depending on the time of day, one currency may be traded more actively on Forex than another. This is due to the working hours of the major financial centers in the respective countries.
To summarize the introductory section, the international currency market, Forex, possesses several advantages compared to other markets, such as the stock market (where stocks are traded). There is no need to stay awake at night in the Far East of Russia, waiting for the Moscow stock market to close. Forex operates round the clock and is the most highly liquid market in the world. The spread of the Internet has led to the emergence of exchange brokers, offering individuals the opportunity to work and earn in Forex. The competition among these online brokers has resulted in advantageous trading offers for individuals. In the introductory section, we intentionally avoided using many specialized terms and concepts related to Forex in order to avoid overwhelming the reader with excessive information right from the start. In the subsequent sections of the website, the picture of Forex trading will become clearer and clearer.