Starting of Forex
The story of forex is not so small as you seem. In the earlier article, we only give you an idea of the major market players of the forex, we did not tell you how the system of trading came into being. The wait is over, we are going to take you on another journey into the birth of Forex.We will discuss more about in our Fx School section.
Birth of Forex
Launch and the collapse of the Bretton Woods System
After the World War II, all of the western countries were devastated. They were economically and finically weak to rebuild their economy. They felt that they need a universal system of exchange to trade with other countries for resources which were essential to help their economy to grow prosperous.
Thus, the establishment of Bretton Woods System came into the world. It was a simple system of economic measurement, which holds the idea that the country’s wealth will be measured in the stock of gold. Thus, the more gold a country has, he is richer. All the country started to exchange their currency in terms of gold and the US provided assistance to convert their currency into gold bars at a standard exchange rate.
But this system soon collapses, after 1971, when the currency of other countries was much larger than the US stock of gold. As a result, Bretton Woods System collapsed.
Launch of Forex
The advancement of technology and communication made it much easy for the world to exchange their currency. In 19902, FX was introduced to the world. But it was only limited to the world super banks. Similarly, many businesses minded groups established different types of a machine (Electronic Communication Network) which could make the FX market open for the general people, that is you and me, retail traders. Where the super banks trade on million units, we, the retail traders, trade on 100 units! This all happened because of the establishment of internet-based trading platforms
Think you have gone to Europe for your vacation. You are very hungry and you want to buy a hamburger from a nearby shop. What you will do
First, you will go to a currency exchange shop to exchange your dollars into euro. Think if the trader’s buying price of Euro is 1 dollar and selling is 1.2 dollar, this different might not make much to you. But in Forex, where trillions of dollars are flying every day, this small amount is what makes the market makers make millions of dollars. Here, market makers are the exchange shop that set the price of a dollar to Euro.
Electronic Communication Network
It is also known as ECB. This is an automated system of trade. This ECB system allows you to close your trading when it has reached a certain point set by you to make a profit or to make stop losing money. The price that you make, it is compared with thousands of market makers, banks to make a profit for you. If it could not make a profit, there is a point set by you to stop losing money. The introduction of Electronic Communication Network helps the retail traders to make their money.
After all these history, you can understand what is meant by retail traders. Yes, that is you and me. They are divided into two types.
- Market Makers : Who sets the price of exchange. Think of the exchange shop in Europe of your exchanging currency. That trade shop is the market maker.
- Electronic Communication Network a system that uses the limit set by traders to make a profit from different of institutions which are present in the interbank.