The system of global trading in foreign currency is known as the Foreign Exchange Market, Forex, or just FX. Over the last three decades the foreign exchange market has become the world's largest financial market, it trades over $2.5 trillion USD daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Forex is part of the bank to bank currency market known as the 24-hour Interbank market.
What is a PIP?
A pip is a term used in the currency market to represent the smallest incremental move an exchange rate can make. Depending on context normally one basis point is 0.0001, as is the case of EUR/USD, GBP/USD, USD/CHF. For example, if the EUR/USD moves from 1.2551 to 1.2552 it is one pip.
How much a PIP worth?
If you trade the full contract (100k of currency) the EUR/USD and GBP/USD are worth approx. $10. In other words if you have a trade with 50 pips in profit, it means the gain is $500. ($10 per pip x 50 pips). If you trade a mini account it is 1/10th of the size and 50 pips will worth $50.
24 Hour Access to the World
Select the Forex market, select the time, and start trading. The massive liquidity of Forex, combined with a true 24-hour Forex market that's traded 5.5 days a week, offers you exceptional independence and Forex currency trading when you want to, not when the market wants you to. The Forex market literally follows the sun around the world, moving from major banking and financial centers of the United States to Australia and New Zealand to the Far East, to Europe and finally back to the United States.
During each trading day, overall foreign currency trading volume is determined by what markets are open and the times each of these markets overlap one another. With each passing second, minute and hour, Forex currency trading volume remains high, but peaks highest when the British, European and U.S. markets are open at the same time - from 1 p.m. GMT to 4 p.m. GMT. The volume of the Pacific Rim markets, such as Japan and Hong Kong, subsides compared to the crest of the U.S. market, but still offer the Forex trader the ability to analyze and trade the highly traded Pacific Rim currencies.
The HISTORY of Forex
The modern foreign exchange market (Fx or Forex) began to develop in 1973. However, money has been around in one form or another since the time of Pharaohs. The Babylonians are credited with the first use of paper bills and receipts, but Middle Eastern moneychangers were the first currency traders to exchange coins from one culture to another. During the middle ages, the need for another form of currency besides coins emerged as the method of choice. These paper bills represented transferable third-party payments of funds, making foreign currency exchange trading much easier for merchants and traders and causing these regional economies to flourish.
From the infantile stages of Forex during the Middle Ages to WWI, the Forex markets were relatively stable and without much speculative activity. After WWI, the Forex markets became very volatile and speculative activity increased tenfold. Speculation in the Forex market was not looked on as favorable by most institutions and the public in general. The Great Depression and the removal of the gold standard in 1931 created a serious lull in Forex market activity. From 1931 until 1973, the Forex market went through a series of changes. These changes greatly affected the global economies at the time and speculation in the Forex markets during these times was little, if any.
Event and date:
1944 Bretton Woods is established to help stabilize the global economy after World War II
1971 Smithsonian Agreement established to allow for greater fluctuation band for currencies
1972 European Joint Float established as the European community tried to move from its dependency on the US Dollar
1978 Free-Floating system officially mandated by the IMF
1993 European Monetary System Fails making way for a world-wide free-floating system
The Bretton Woods Accord
The first major transformation, the Bretton Woods Accord, occurred near the end of World War II. The United States, Great Britain and France met at the United Nations Monetary and Financial Conference in Bretton Woods, N. H., to design a new global economic direction. The location was chosen because, at the time, the U.S. was the only country unscathed by war. Most of the major European countries were in shambles. Up until WWII, the British pound was the major currency by which most currencies were compared, but that changed when the Nazi campaign against Britain included a major counterfeiting effort against its currency. In fact, WWII vaulted the U.S. dollar, from a failed currency after the stock market crash of 1929 to benchmark currency, by which most other international currencies would become compared and valued. The Bretton Woods Accord was established to create a stable environment, leading to an onslaught of other global economies restoring themselves and their currencies. In fact, the Bretton Woods Accord established the pegging of currencies and the International Monetary Fund (IMF) in hopes of stabilizing the global economic situation.
Major currencies were now pegged to the U.S. dollar, fluctuating by one percent on either side of the set standard against the dollar. When a currency's exchange rate would approach the limit on either side of this standard, the respective central bank would intervene to bring the exchange rate back into the accepted range. At the same time, the U.S. dollar was pegged to gold at a price of $35 per ounce, further bringing stability to other currencies and world Forex situation. The Bretton Woods Accord lasted until 1971. Ultimately, it failed, but it did accomplish what its charter set out to do, which was to reestablish economic stability in Europe and Japan. The major reason it failed was because it continued to use a set standard to fix a currency against a smaller market, such as gold.
The Beginning of the free-floating system
After the Bretton Woods Accord came the Smithsonian Agreement in December of 1971. This agreement was similar to the Bretton Woods Accord, but allowed for a greater fluctuation band for the currencies. In 1972, the European community tried to move away from its dependency on the dollar. The European Joint Float was established by West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. The agreement was similar to the Bretton Woods Accord, but allowed a greater range of fluctuation in the currency values.
Both agreements suffered mistakes similar to the Bretton Woods Accord and, in 1973, collapsed. The collapses signified the official switch to the free-floating system. This occurred by default, as there were no new agreements to take their place. Governments were now free to peg their currencies, semi-peg or allow them to freely float. In 1978, the free-floating system was officially mandated.
In a final effort to gain independence from the dollar, Europe created the European Monetary System in July of 1978. Like the previous agreements, it failed in 1993, but what followed was an evolution from a combination of the EMS and the Bretton Woods Accord.
Today, the major currencies, such as the U.S. dollar, Euro, British pound, Swiss franc and the Japanese yen, move independently from other currencies. The currencies are traded by anyone who wishes, including an influx of speculation by banks, hedge funds, brokerage houses and individuals. Only on occasion do some of the central banks intervene to move or attempt to move currencies to their desired levels. The underlying factor that drives today's Forex markets, however, is supply and demand. The free-floating system is ideal for today's Forex markets. The supply and demand of currencies are driven by three factors, including interest rates and interest rate differentials, commodities and global trade. The Forex market is the prime market of the world by all which all others can be considered derivatives (like futures and options).
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