Forex Trading - Introduction

Forex is the short form for Foreign Exchange.  Forex Trading is therefore trading (people simultaneously buy one currency and sell another) in the currency of different countries of the world.

The current Forex system was established in the 1970s when free currency exchange rates were introduced, during this period, the US dollar overtook the British Pound as the benchmark currency.  The process of trading currencies in modern times evolved in six main stages thus:

·         Signing of the Bretton Woods Accord;

·         Constitution of the International Monetary Fund (IMF);

·         Emergence of the free-floating foreign exchange markets;

·         Creation of currency reserves;

·         Constitution of the European Monetary Union and the European Monetary Cooperation Fun; and

·         Introduction of the EURO as a currency.

The Breton Woods Accord was signed in July 1944 by the United States, Great Britain and France which agreed to make the currency market stable, particularly due to government controls on currency values.  In line with the accord, the major trading currencies were pegged to the US dollars in the sense that they were allowed to fluctuate only 1% on either side of that rate.  When a currency exceeded this range, marked by intervention points, the central bank in charge had to buy it or sell it, and thus bring it back into range.  In turn, the US dollar was pegged to gold at $35 per ounce.  Thus, the US dollar became the world’s reserve currency.

The purpose of IMF is to consult with one another to maintain a stable system of buying and selling the currencies so that payments in foreign money can take place between countries smoothly and timely.  The main functions of the IMF are to:

·         Promote international cooperation by providing the means for members to consult and collaborate on international monetary issues;

·         Facilitate the growth of international trade and thus contribute to high levels of employment and real income among member nations;

·         Promote stability of exchange rates and orderly exchange agreements, and discourage competitive currency depreciation;

·         Foster a multilateral system of international payments, and to seek the elimination of exchange restrictions that hinder the growth of world trade; and

·         Make financial resources available to members, on a temporary basis and with adequate safeguards, to permit them to correct payments imbalances without resorting to measures destructive to national and international prosperity.

The IMF officially mandated the free-floating of currencies since 1978.   This made the currency to be traded by anybody and its value the function of the current supply and demand forces in the market, and no specific intervention points to be observed.  Currency reserve was introduced as a tool for individuals and corporate bodies to protect investments in times of economic or political instability for international transactions.  After the Second World War, the US dollar was made the reserve currency but currently the EURO and Japanese yen are also reserve currencies.  The portfolio of reserve currencies may change depending on specific international conditions.

Just like in conventional trading, online currency trading is buying a currency now and selling it when it appreciates as you expected.  For example, the US$ sells for N100 and due to an occurrence you feel the dollar is going to strenghten against the Naira and you buy, if the US$ appreciates as you speculated and now sells for N110 then you would have made a profit of N10 on every US$ you bought if you sell it back for N.

What currencies are traded?

There are many currencies traded but the most commonly traded are referred to as the “Majors”; more than 80% of daily transactions on Forex trading involve the seven Majorswhich are the US dollar (USD), EURO (EUR), Great Britain pound (GBP), Japanese Yen (JPY), Swiss Franc (CHF), Austrialian dollar (AUD) and Canadian dollar (CAD).

Who can trade Forex?

Forex trading is opened to corporations, small businesses, commercial banks, investment funds and private individuals.  It is the largest financial market in the world averaging a daily turnover of over $1 trillion.

What do you need to trade forex?

·         Personal computer

·         Internet connection

·         Domiciliary account

·         Trading account

·         Training