Forex trading is a popular way of investing online for traders of all different backgrounds and experience levels, from retail traders to institutional investors. The forex market is easily accessible to anyone around the world with an internet connection, trading platform and an account with a forex broker.
What is the forex market?
The foreign exchange (FX) market is the largest in the world in terms of trading volume which is worth trillions on a daily basis. In the forex market, participants trade currencies. Before online trading, the forex market was only accessible to big financial institutions, corporations, central banks, hedge funds and the such. Today, the forex market is open to retail traders who wish to speculate on the fluctuating price of currency pairs in order to try and make a profit from the price differences.
Brief history of the forex market
Following the Second World War, all of the major currency pairs were valued against the value of gold. This was as a result of an that was reached by the global community at a meeting held at Bretton Woods. Whilst the deal initially made the exchange rates stable, this eventually became unsustainable following the significant economic growth experienced after the second world war when the price of gold rose significantly and thus became more and more costly. In 1971, the Bretton Woods system became defunct, which in turn allowed for the easy and free-floating of the exchange rate.
In the 1990s when the internet was becoming more widely used, banks and small companies developed online systems that created automated quotes which made it possible for people to trade instantaneously. Thus, these technological advancements and regulations put in place, generated a new category of trading brokers that allowed individuals to buy and sell forex. In a nutshell, this where forex trading originated from. The developments opened many doors for retail forex trading with online brokers helping traders located in various parts of the world to place their trades.
Who trades the forex market?
The main participants of the forex market can be categorized into two groups, the retail investors and institutional investors. Each of these groups have their own goals and objectives for trading forex.
Institutional forex investors
The institutional investors can be considered as the most significant traders in the forex market. The trading volume of these investors make up almost 95% of the forex markets volume. Institutional investors include commercial banks, central banks, hedge funds and corporations.
Retail forex investors
Retail traders are the private individuals who speculate on the forex market using their own funds and taking on the risk. The volume of retail traders is much less compared to the institutional investor and thus they tend to not have as great an impact on market movements.
Introduction to forex trading conclusion
Hopefully you now have a brief understanding of the forex market. If you would like to learn more, I have complied some handy guides including how to trade forex and how to open a forex trading account.