The history of Forex Back in prehistory, there was no concept of currency.

A cow was a cow and a sheep was a sheep. People bartered goods for other goods. The problem was that when you traded ten sheep for five cows, you had to find somewhere to keep the cows. Cows are large; they don't fit in your pocket. Something had to change. Mesopotamia Urban societies started to emerge in Mesopotamia about 5300 BC. Wealth was based on agricultural products primarily grain. Grain was stored in temple granaries, and when people made deposits, they needed receipts the receipt came in the form of a piece of metal. By 3000 BC, this evolved into the shekel, a measure of barley. Shekels could be converted into metals such as copper, silver and gold. Then, around 1700 BC, the Code of Hammurabi established formal laws in Mesopotamia. This included rules around the use of money in Mesopotamian society. Money was born. Coins The problem with most early money was that there wasn't any standard measure. A piece of gold could be small or large, so there was no way to place a consistent value on traded goods. Coins solved this problem. They had a standard weight, and were stamped with symbols by the state to prove their authenticity. The first standardised metal coins appeared in Greece in the seventh century BC. The gold standard The value of a coin continued to be determined by its weight into the early 17 th century; a Dutch Guilder had one weight and a French franc had another. However, as trade grew, coins became more and more impractical. Banks started to issue money in large denominations, using cheap materials such as paper. Physical money no longer had an intrinsic value; instead it could be redeemed at banks for gold or other precious metals. After the Napoleonic wars of 1803-1825, a number of nations fixed the value for their currencies against gold, and promise to redeem the notes directly. Currencies could now be exchanged based on their fixed values. This was the gold standard. The world at war The gold standard continued until World War I. However, there were growing concerns about some countries' ability and willingness to redeem their banknotes. The chaos of World War I put an end to the gold standard, and nothing replaced it until 1944. Although the gold standard was dead, international financial institutions did start to emerge between the wars. The most important was the Bank or International Settlements (BIS),

founded in Basel in 1930. Its charter was to support countries without mature financial systems, or those with balance of payments deficits. 1944 In 1944, delegates from 44 Allied nations met in the United States at Bretton Woods. Economic luminaries including John Maynard Keynes and Harry Dexter White worked to create a new global financial system, so that shattered countries could be rebuilt after the war. The Bretton Woods Agreements were signed in July, 1944 with the following results:

The International Monetary Fund (IMF) was established Countries who cooperated with the IMF could receive stabilisation loans The US dollar and British pound were announced as international reserve currencies Currency values were fixed against the US dollar - with only 1% deviation allowed The value of the dollar was fixed against gold Countries could only alter their exchange rates with IMF permission Currencies became convertible Governments were required to hold reserves and intervene in currency markets Nations had to pay a fee in gold and national currency to join the IMF

1947 After World War II, the US became increasingly concerned with the ability of a war-ravaged Europe to resist Soviet communism. In 1947, it established the European Recovery Plan, popularly known as the Marshall Plan after the US Secretary of State, George Marshall.

Over four years, European countries received nearly $13 billion dollars under the Marshall Plan, allowing them to buy the goods and services they needed to rebuild. 1964 In 1964, Japan made the yen convertible. With all major currencies now convertible, it became clear that the US could no longer sustain a fixed dollar rate against gold. US dollar inflation became a major issue, and the US administration took steps to control US dollar transactions through taxation of exchange differentials. Costs increased for foreign borrowers, leading to the creation of a new eurodollar market. 1967 The British balance of payments deteriorated through the 1960s, and their gold reserves declined from $18 billion to $11 billion. In 1967, the UK had to devalue the pound, striking Bretton Woods a crippling blow. At the same time, US debt continued to grow. 1970 In 1970, interest rates decreased sharply in the US. Investors moved their capital to Europe, where rates were higher. The worst dollar crisis to date ensued. 1971 Events accelerated in 1971:

In May, Germany and The Netherlands allowed open trading of their currencies In August, the US balance of payments deficit reached crisis point and President Nixon responded by stopping conversion of US dollars into gold

In December, matters came to a head:

A last attempt was made to save Bretton Woods in a meeting at the Smithsonian Institute in Washington Exchange rates were allowed to deviate up to 4.5% from their fixed values Central banks made major interventions in the currency markets - including $5 billion from the Bundesbank Exchange rates could not be controlled despite these interventions Currency exchanges in Europe and Japan were closed temporarily The US devalued the dollar by 10% Developed countries floated their currencies ending fixed exchange rates

1973 to 1974 Over this period, events continued to unfold:

The US dismantled the tax measures and other restrictions it had introduced in 1964 Central banks stopped intervening in the currency market Speculators made enormous profits once interventions stopped Two major banks - Bankhaus Herstatt and Franklin National Bank - went bankrupt Speculation damaged many other banks The Bretton Woods system ceased to exist

1976 Representatives of major nations met in Kingston, Jamaica, to create a new global currency system. This had the following results:

Gold was no longer used as the basis of currency valuation International organisations were set up to control currency conversion Currencies were used to buy other currencies Commercial banks became the main mechanism for currency conversion Exchange rates were floated and were driven by market forces

The modern forex market had begun.

What is Forex? One of the questions we get asked all the time is What is forex trading? When did it start? How big is it? Who are the major players? What makes currency rates change? Here are the answers to all your questions! What is forex?

Forex is the international market for the free trade of currencies. Traders place orders to buy one currency with another currency. For example, a trader may want to buy Euros with US dollars, and will use the forex market to do this. The forex market is the world's largest financial market. Over $4 trillion dollars worth of currency are traded each day. The amount of money traded in a week is bigger than the entire annual GDP of the United States! The main currency used for forex trading is the US dollar. When did forex start? As the world continued to tear itself apart in the Second World War, there was an urgent need for financial stability. International negotiators from 29 countries met in Bretton Woods and agreed to a new economic system where, amongst other things, exchange rates would be fixed. The International Monetary Fund (IMF) was established under the Bretton Woods agreement, and started to operate in 1949. All exchange rates changes above 1% had to be approved by the IMF, which had the effect of freezing these rates. By the late 1960's the fixed exchange rate system started to break down, due to a number of international political and economic factors. Finally, in 1971, President Nixon stopped the US dollar being converted directly to gold, as part of a set of measures designed to stem the collapse of the US economy. This was known as the Nixon shock, and lead to floating rate currency markets being established in early 1973. By 1976, all major currencies had floating exchange rates. With floating rates, currencies could be traded freely, and the price changed based on market forces. The modern forex market was born. Who trades on the forex market? There are many different players in the forex market. Some trade to make profits, others trade to hedge their risks and others simply need foreign currency to pay for goods and services. The participants include the following:

Government central banks Commercial banks Investment banks Brokers and dealers Pension funds Insurance companies International corporations Individuals

When is the forex market open? Unlike stock exchanges, which have limited opening hours, the forex market is open 24 hours a day, five days a week. Banks need to buy and sell currency around the clock, and the forex market has to be open for them to do this. What factors influence currency exchange rates?

As with any market, the forex market is driven by supply and demand:

If buyers exceed sellers, prices go up If sellers outnumber buyers, prices go down

The following factors can influence exchange rates:

National economic performance Central bank policy Interest rates Trade balances imports and exports Political factors such as elections and policy changes Market sentiment expectations and rumours Unforeseen events terrorism and natural disasters

Despite all these factors, the global forex market is more stable than stock markets; exchange rates change slowly and by small amounts. What are the advantages of the forex market? The forex market has many advantages. These include the following:

It's already the world's largest market and it's still growing quickly It makes extensive use of information technology making it available to everyone Traders can profit from both strong and weak economies Trader can place very short-term orders which are prohibited in some other markets The market is not regulated Brokerage commissions are very low or non-existent The market is open 24 hours a day during weekdays

http://www.forex4you.com/forex/

Disadvantages of the forex market

The foreign exchange market, or Forex, has unique disadvantages not found in other trading environments. Without understanding the pitfalls you are almost guaranteed to lose money. Central Bank Intervention

Many government central banks intervene in the markets in order to preserve the value of their currency, unbeknown to the average investor. This intervention is usually camouflaged to keep the market from knowing. For example, the central bank may use a network of smaller banks to buy or sell on their behalf. Regardless of the camouflage used, the result is the same: the currency value is artificially strengthened or weakened, making it difficult to make trades based on market fundamentals.

Timing Difficulties

The foreign exchange market is a bartering based system. This means that one item (a given currency) is exchanged directly for another item (a second currency). These trades are usually made through a third "vehicle" currency. So, for example, if an investor wants to trade from the Brazilian Real into the British Pound, holdings of Real are usually converted into the U.S. Dollar and then reconverted into the Pound. In such a complex arrangement, it can be difficult to time when the vehicle currency will remain stable and the currency to be bought will appreciate against the base currency all within the same time frame. Differences Between Retail and Wholesale Pricing

Roughly two-thirds of all trades on the foreign exchange are made between dealers and large organizations such as hedge funds and banks. Organizations that make trades of this size operate at wholesale prices (known as interbank trading). The investor, on the other hand, is forced to buy and sell at the retail price (known as client trading). The difference is known as the spread, and shows itself in the form of commissions and fees paid to the investor's broker. When dealing with spreads, it becomes a challenge to compete against the larger organizations that start with a lower entry point and can sell profitably with far less market fluctuation. 24 Hour Trading

Unlike organized trading exchanges with a central location, the foreign exchange market is open for trading 24 hours a day. With currency fluctuations being triggered from traders across the globe, it's a never-ending challenge to stay profitable. This makes forex trading time intensive and constantly hectic.

http://www.ehow.com/list_6499817_disadvantages-foreign-exchange.html Functions Of Forex Market The functions of forex market serves two main functions: converting currencies and reducing risk. There are four major reasons firms need to convert currencies. First, the payments firms receive from exports, foreign investments, foreign profits, or licensing agreements may all be in a foreign currency. In order to use these funds in its home country, an international firm has to convert funds from foreign to domestic currencies. Second, a firm may purchase supplies from firms in foreign countries, and pay these suppliers in their domestic currency. Third, a firm may want to invest in a different country from that in which it currently holds underused funds. Fourth, a firm may want to speculate on exchange rate movements, and earn profits on the changes it expects. If it expects a foreign currency to appreciate relative to its domestic currency, it will convert its domestic funds into the foreign currency. Alternately stated, it expects its domestic currency to depreciate relative to the foreign currency. An example similar to the one in the book can help illustrate how money can be made on exchange rate

speculation. The management focus on George Soros shows how one fund has benefited from currency speculation. Exchange rates change on a daily basis. The price at any given time is called the spot rate, and is the rate for currency exchanges at that particular time. One can obtain the current exchange rates from a newspaper or online. The basic and primary functions of forex market are to transfer purchasing power between countries. The transfer function is performed through T.T, M.T, Draft, Bill of exchange, Letters of credit, etc. the bill of exchange is the most important and effective method of transferring purchasing power between two parties located in different countries. Anothers important functions of forex market are to provide credit to the importer debtor. The exporters draw the bill of exchange on importers on their bankers. On acceptance of the bills by the importer or their bankers, the exporter will get the money realized on the maturity of the bills. In case the exporters are anxious to receive the payment earlier, the bills can be discounted from their bankers, or foreign exchange banks or discount houses http://www.cataloggue.com/04281783-functions-of-forex-market/ The People in Charge of Forex Regulation

The NFA the National Futures Association. The NFA is a self-regulatory organization for the US futures industry. Its purpose is to safeguard market integrity and protect investors by implementing forex regulations. Membership in NFA is mandatory for any futures or forex broker operating in the US .It is an independent regulatory body with no ties to any specific marketplace. The CFTC the Commodity Futures Trading Committee. Created by congress, the Commodity Futures Trading Commission (CFTC) was formed in 1974 as an independent agency with the mandate to issue forex regulations for financial markets in the United States. The CFTC's forex regulations assure the economic utility of the markets by encouraging their competitiveness and efficiency, and protecting market participants against and abusive forex trading practices. The FSA - The Financial Services Authority. This is a UK based independent body, given statutory powers by the Financial Services and Markets Act 2000. The FSA regulates the financial services industry in the UK, which is made possible by the FSA's regulation making, investigatory and enforcement powers. The FSA is obliged to have regard to the Principles of Good Regulation. Various National Authorities each country has its own national body for regulating its financial service industry. These are the bodies that decide on forex regulations, you must therefore make sure that your forex broker is licensed in the country from which they operate. This ensures that they are obliged to operate in accordance to that country's forex trading regulations.

Forex Regulations for Forex service providers

A forex broker/ dealer / service provider must be licensed in the country in which their operations are based. This is a very important forex regulation to look out for, since if the broker you are looking into isn't licensed, they are operating against the law.

Being approved by the national regulatory institutions ensures that the broker must maintain strict quality control standards and that your business with the broker is safe, fair and honest. By regulation, licensed forex brokers are subject to periodical audits, reviews and evaluations which enforce their need to comply to industry standards. Forex brokers must maintain a sufficient amount of funds to meet their customers' needs. This forex regulation ensures that the forex broker is able to execute and complete forex contracts made with their clients. Forex brokers are in no way allowed to misrepresent their services or to solicit customers to trade forex without a fair representation of the risks involved. Be wary of brokers who promise profits in the forex market, since by forex regulation they are not in any position to do so. No broker can guarantee profits in the forex market. A Forex broker is obliged to honor each and every forex contract (position) opened by a client. Failure to complete the forex contract with a client will lead to the revoking of the broker's license.

http://www.forex-regulation.com/