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Brief Context and background:
Money in one form or other had been used as a means to exchange between the sellers and buyers World over. Gold or Silver coins became very popular in the beginning. The challenge had always been how to value the local currencies as compared to the foreign currencies in the event that there was a trans-national trade taking place. Then the strength of the country’s currency was dependent on the amount of gold reserves that country “A” had. The larger the gold reserves that a country had, the stronger was their currency. That was known as The Gold Standard, which became accepted internationally around 1880. Numerous ‘ currency wars’ between the nations of the world took place over many centuries without much certainty up until on or about the 1940s when the Great Britain and USA developed proposals to stabilize the ‘ currency wars’ among the Nations of the World. In July 1944 at Brenton Woods, New Hampshire, an agreement under the United Nations Monetary and Financial Conference was entered into between the nations of the world. The agreement became known as The Brenton Woods Agreement ( BWA). Under the BWA the currencies of participating nations could be converted into US Dollar at a fixed rate, and foreign central banks could convert the US Dollar into gold at a fixed rate, meaning that the world’s leading currencies were pegged against the US Dollar.
This context is of great significance because in a real life trading environment the US Dollar is still the dominant currency even to date. This system continued up until about the 1970s when the currency wars again re-surfaced. During the later part of 1970 the currencies of the world abandoned the 1944 system and decided to ‘ float ‘ their currencies in an open market. The idea being to let the market decide the value of a given currency based on the demand and supply of the currency and the economic health of a currency’s nation. This was called International Monetary Market
( IMM). IMM is the collection of financial institutions of the world ranging from government central banks, commercial banks, brokerages, fund managers, individuals, and the like. This ‘ new monetary regime’ effectively gave birth to the FOREX in 1971 as we know it today.
The DNA of the FOREX Industry
It is possible that someone else might interpret the DNA of the FOREX differently but in essence it will lead to the same outcome.
The important participants
The central banks of different countries play a very important part in the FOREX industry. These banks seek to control the money supply and sometimes adopt an official and / or unofficial target rates for their currencies.
Commercial Banks: Major Commercial Banks take part in FOREX, mainly on behalf of their corporate clients, and also for themselves.
Hedge Funds: Hedge Funds are said to have the ability to exploit the country’s economic weakness and expose the country’s unstable financial plight .
Individuals: A lot of individuals all over the world take part in FOREX. Individual as an individual may not have much impact but a combination of all the individuals world over is a force to be reckoned with.
The rationale behind trading FOREX
FOREX trading is very liquid, probably the most liquid of all the financial markets in the entire world. In the recent years Hedge Funds had grown an appetite in FOREX which has helped to improve the liquidity of this institution a great deal. Over and above FOREX trade has a lot of transparency attached to it. It is of critical importance that any ( individual) trader must watch the entry level ( point) of these market giants so as to gain financially in their trades.
The use of automated trading systems makes trading FOREX very convenient. One can place a trade at 08h00am and go to work during which period the trading goes on as if one was physically watching their graphs grow or fall. It is very cheap to start to trade. Depending on the trading agency that one has registered with the average starting price is about R500
[ five hundred rand] .
The use of leverage allows one to acquire a higher level of volumes of money than what one actually has.
The type of a suitable dealer for you as a trader
There are numerous dealers out there wherein a FOREX trader needs to register with before one can trade. It is a confusing task for a new trader as to which dealer is best suitable for their specific needs. Nevertheless the best advice is that a novice trader must keep looking for other dealers as and when the traders gain more insight into the practice. There are numerous features that one should consider like, but not limited to-technology used, spreads, leverage, tools, management, security, and many more. In our next feature we will continue to finalize The DNA of FOREX before we move forward.