Anyone who wants to make a living on Forex trading needs to understand the underlying fundamentals of the Forex market. Doing so will be a great opportunity to make a smooth and profitable Forex career.
It is a pity that many do not take the time to research the market before investing in it; which continued to account for about 90% of the losses in the Forex market.
This article will focus on the key things you need to understand before investing in the Forex market, but first here is a brief history of the Forex market.
Short History of Forex Market:
The international monetary system has come a long way; from the early days of the gold standard system to this era of social commerce.
These improvements were initiated by major market players who came up with theories on how to best handle trading; some of which are viable so far. The history of the international monetary system has continued to change and traders need to understand how it works and apply that understanding to their trade.
Gold Standard System:
The gold standard system is a monetary regime that allows the capture of a dominant government currency and freely converts it into gold. This system also supports the use of gold or bank receipts, which will be used as the primary means of exchange. For the purposes of this system, gold or gold receipts are also the standard for international transactions where exchange rates between different countries are fixed based on the relative values of the gold equivalent between individual currencies.
Before the introduction of fiat currencies, gold and silver were used for settlement in national and international transactions. A person can give a certain amount of gold in exchange for the size of the item; that (and some other obsolete payment methods) in the past have been all kinds of trading.
However, this method of trading had some important problems. The values of these metals have been greatly influenced by the global speed of supply and demand. If the demand for gold is high, then its value will be high; but if its demand is low, then its value will be low. In addition, if the supply of gold is low, the value will increase, but if the supply is large, its value will decrease.
A typical example of this is the discovery of new gold mines, which leads to higher gold supply and lower value of gold metal. This theory of supply and demand is an eternal theory that is still applicable in Forex trading in this present age, even if the gold standard is not practically practiced.
At the beginning of World War II, the gold standard eventually crashed. Until then, however, major economies had allocated a certain amount of their currencies to the measure of gold (ounce). Over time, the difference in value between two different currencies can be found by comparing both currencies with the value of gold. Over time, international transactions took place, these differences being used as a dual-currency exchange rate. This is how Forex trading started as we know it today.
Gold standard system on the current day
Although the gold standard has been lifted, it is still the final form of monetary value and can be used as a safe haven for financial stability. Current financial systems are not sound. For example, the US dollar almost inevitably influences inflation by increasing government borrowing for printing paper money. One of the main consequences is that the US dollar’s relationship with gold metal has recently developed and been reversed. There is no other way for investors to invest in gold as a way to guard against inflation.
Although the gold standard is no longer as widely practiced as before, it still exists. Many Forex trading platforms offer gold currency pairs for their clients to trade, and as mentioned earlier, investors are putting their money into gold to avoid the effects, if not all, of the volatile economy. At first, as a beginner, Forex traders are usually interested in trading major currency pairs, which, by the way, is a really good place to start Forex trading; however, as skills and abilities improve, they tend to invest in gold because of the level of stability it brings to the table.
Like the gold standard system, the Breton tree system has also played a very important role in Forex history. It was introduced around World War II, with the primary goal of replacing gold with the USD, the primary standard for converting world currencies.