Forex Trading made simple…

The World of FX

The World of FX

FX or Forex stands for Foreign Exchange which is the exchange of one currency for another.

For as long as there have been civilizations, there has been trading.
In its simplest form it is the barter and exchange of one item of value for another.

  • 5000 years ago the Phoenician Traders travelled across Europe, Africa and Middle East exchanging goods from one continent with another
  • From 3000 years ago goods were carried inland by Caravans (using Camels to carry).
  • From 100 BC The Silk Road connected Europe and Asia - China demanded Gold from Rome in exchange for its silk. This was the start of global economics
  • 1602 Dutch East India Company was formed and issued tradable stocks creating the first stock market

The Origin of Money

Today it is not difficult to imagine a system of exchange so that we can freely buy and sell products, services and ideas as we have all grown up with using Dollars, Francs, Pounds, Rands, Yen or Euros. Rather than having to go to the local supermarket with a chicken in exchange for bread or a piece of silver for that juicy steak, we are able to use Money – coins, notes and now “plastic” as the electronic forms of money transfer are often referred to.

As shared above we did not always have money as a form of payment, but originally traded using a bartering system. This was replaced by using precious metals such as bronze, silver and gold to exchange for material goods. These metals were used in standard sizes and purity, however it was inconvenient to be dragging sacks weighed down with the precious metals they contained. During the late Middle Ages (14th/15th Century) a form of paper IOU started to gain popularity as a method of exchange.

This was the start of currency as we know it today. Each pound note states “I promise to pay the bearer on demand the value of…

The advantage of carrying around 'precious' paper reduced the risk of carrying bags of precious metal. Eventually stable governments adopted paper currency and backed the value of the paper with gold reserves. This came to be known as the gold standard. In July 1944 the dollar was fixed to 35 USD per ounce of gold and other currencies were fixed to the dollar.

In 1971, President Nixon suspended the convertibility to gold and let the US dollar 'float' against other currencies allowing a fluctuation in currency values when compared to each other.

What is FX Trading?

With the removal of the gold standard, currencies are free to gain or lose value based on the economic conditions of its country. The USD (US Dollar) is the standard currency for the World as the United States of America is the largest and most dominant economy. All other currencies are compared with the USD in terms of their value. For example the British Pound (GBP) is expressed as 1.62USD and if it is valued at 1.00USD the British economy would be seen as very weak and if valued at over 2.00USD the British economy would be seen as very strong.

As we live in a global economy with large companies that operate and trade in multiple countries there is a need to these businesses to move money from one currency into another. To keep it simple let’s look at McDonald’s Hamburger Restaurants as an example. McDonald’s has restaurants all over the world and therefore trades its hamburgers in the money of every country in which it is has restaurants. But McDonald’s is an American business and has to be audited every year to declare its profits, pay its shareholders and pay its taxes. In order to do this the profits need to be converted into US Dollars the standard currency for US Businesses.

In a similar way British Airways needs to pay its fuel supplier in Russia. British Airways uses British Pounds but the Russian oil company uses Rubels. To be able to buy fuel from Russia, the British pound needs to be exchanged into Rubels so that the Russian Oil company can accept payment.

To manage this movement and exchange of money from one currency to another there are a core group of Major Banks controlling the whole process. The currency market is so large that it has been compared with the Pacific Ocean and is estimated that $4Trillion is traded every day.

As a Bank moves money from one currency to another it sells the one currency and buys the other currency. For example if we were a European company buying product from a US company we would have to sell the Euro (our currency) and buy the USD (our supplier’s currency). With many businesses and banks doing this every day this causes a move in the value of each currency. So if most businesses and banks are buying USD and selling Euro the value of the USD would go up and the Euro would go down.

This movement of trade is so large that it creates opportunity for profit by just conducting the exchange for no other purpose than profit. To take advantage of this market Banks have teams of traders who are employed to only trade the difference in currency prices for profit. With the growth of the internet the ability to trade currencies is no longer limited to Banks and the super-rich but the general public.

There are now many online Forex brokers advertising their systems and services as the retail trading market experiences massive growth. Forex offers everyone the opportunity to trade the World’s largest market for relatively low entry costs and be able to generate an income from home. In the current economic condition with job losses and part time employment more and more people are looking for ways to supplement their income and are finding themselves evaluating Forex as a viable form of income.

FountainFX offers an open platform in which to learn, test, evaluate and discover how to trade Forex without the confusion of many different and conflicting strategies that can be found for free on the internet or the expensive trading courses that can deplete your financial resources.