Forex History
How It All Began

In July 1944, the United States, Great Britain and France met at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire to design a new economic order. This location in the U.S. was chosen because, at the time, it was in the only country unscathed by war. Most of the European countries were in shambles.

Up until WWII, the British Pound had been the major currency by which most others were compared. This changed when the Nazi campaign against Britain included a major counterfeiting effort.

After the war, most agreed that international economic instability was one of the principal causes of the conflict, and that such instability needed to be prevented in the future. The agreement, which was developed primarily by renowned economists John Maynard Keynes and Harry Dexter White, was initially proposed to Great Britain as a part of the Lend Lease Act – an American act designed to assist Great Britain in post-war redevelopment efforts.

After various negotiations, the final form of the Bretton Woods agreement consisted of several key goals:

1. The formation of key international authorities designed to promote fair trade and international economic harmony.
2. The fixation of exchange rates between currencies.
3. The convertibility between gold and the US dollar, thus empowering the US dollar as the reserve currency of choice for the world.

Major currencies were pegged to the US dollar. These currencies were allowed to fluctuate by one percent on either side of the set standard. When a currency's exchange rate would approach the limit on either side of this benchmark, the respective central bank would intervene, thus bringing the rate back into the accepted range.

However, of these three goals, only the first one is still relevant today.

Forex - How It Works

All things considered, Forex is not much different from trading equities, commodities, or other futures. This is a safe assumption, except for two very big differences – available leverage and the size of the market.

The leverage available to the average Forex trader is a significant advantage over other vehicles, if you use it and you are on the right side of your trade. If you use it and you are on the wrong side of the market, the disadvantage can be just as significant. Nevertheless, skilled traders have greater opportunity in this marketplace than in any other because of the leverage available to them.

Forex - Understanding Margin

Perhaps the easiest use of margin for most people to understand occurs when someone buys a home. Most people do not pay cash for houses. Instead, you might put down as little as $10,000 for a $200,000 residence. If the home increases in value to $210,000 and you sell, you have made 100% on your investment ($10,000 profit divided by $10,000 cash investment [margin] = 100%).

Forex - Understanding Spreads

The term “spread” refers to the difference in the bid and ask price of a given contract or currency pair.

Forex - Market Structure

The foreign exchange market is the generic term for the worldwide institutions that exist to exchange or trade currencies. Foreign exchange is what is referred to as "Forex" or "FX." The foreign exchange market is an over the counter (OTC) market, meaning that there is no central exchange and clearing house where orders are matched. FX dealers and market makers around the world are linked to each other around-the-clock via telephone, computer, and fax, creating one cohesive market. Since there is no centralized exchange, competition between market makers prohibits monopolistic pricing strategies. If one market maker attempts to drastically skew the price, then traders simply have the option to find another market maker. Moreover, spreads are closely watched to ensure that market makers are not whimsically altering the cost of the trade.