Original article credit: Bitget News. Written by contributor on Bitget. Source: https://www.bitget.com/news/detail/12560604894403
Title: Comprehensive Overview of the Forex Market and Its Evolution
The foreign exchange market, more commonly known as Forex or FX, is a global decentralized financial system where currencies are traded. With a daily trading volume that exceeds $7.5 trillion as of 2022, Forex is the world’s most liquid financial market. Investors, multinational companies, central banks, hedge funds, and individual traders participate in the Forex market for various reasons, from speculation to international commerce and hedging currency exposure.
This article explores the history, participants, market structure, currency pairs, popular trading strategies, and technological advancements that continue to evolve this dynamic market.
What is Forex?
Forex refers to the marketplace where national currencies are traded against one another. Organized as an over-the-counter (OTC) market, Forex functions without a centralized exchange. All transactions occur electronically over computer networks, primarily through platforms or interbank systems operated by financial institutions.
Because of its global nature, the Forex market operates 24 hours a day, five days a week, creating continuous opportunities for trading. Traders speculate on currency price movements to generate profits or hedge currency exposure.
History and Evolution of the Forex Market
The Forex market has evolved over centuries, impacted by economic, political, and technological shifts. Key historical milestones include:
– The Gold Standard Era (1870s–1914): National currencies were pegged to gold, promoting long-term exchange rate stability.
– Bretton Woods System (1944–1971): Post-World War II, countries agreed to fix their currencies to the US dollar, which itself was convertible to gold.
– Collapse of Bretton Woods (1971): The US terminated dollar convertibility to gold, allowing currencies to float freely, leading to the modern Forex market.
– Rise of Electronic Trading: With the advent of digital communication during the 1990s and early 2000s, electronic platforms democratized access to the Forex market, enabling individuals and retail traders to participate alongside banks and institutions.
Who Participates in the Forex Market?
The Forex market participants are diverse and serve various functions:
– Central Banks: Influence monetary policy, stabilize currencies, and control inflation.
– Commercial Banks and Financial Institutions: Handle large transaction volumes for clients and conduct speculative trading.
– Corporations: Engage in Forex to manage operational risks associated with international supply chains, foreign revenues, and procurement.
– Hedge Funds and Investment Managers: Use Forex for managing portfolios and hedging.
– Retail Traders: Individual investors who access Forex via brokers and trading platforms.
Market Structure and Trading Sessions
The Forex market operates through a global network of banks in major financial centers: London, New York, Tokyo, and Sydney. Trading moves through four main sessions:
– Sydney Session: Opens at 10 PM GMT, relatively quiet but marks the beginning of global trading.
– Tokyo Session: Starts at 12 AM GMT, with a focus on the Japanese yen and other Asian currencies.
– London Session: Begins at 8 AM GMT, known for high liquidity and activity.
– New York Session: Opens at 1 PM GMT and often overlaps with London, offering substantial trading volume and volatility.
Currency Pairs Explained
Currencies are quoted in pairs, where the first currency is the base and the second is the quote currency. Currency pairs fall into three categories:
1. Major Pairs:
– Include the most traded currencies globally
– Usually paired with the US dollar
– Examples include:
– EUR/USD
– GBP/USD
– USD/JPY
– USD/CHF
– AUD/USD
– USD/CAD
– NZD/USD
2. Minor Pairs:
– Do not include the US dollar
– Feature crosses of majors such as EUR/GBP, GBP/JPY, EUR/CHF
3. Exotic P
Read more on EUR/USD trading.