History of the Forex Market
Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world's currencies trade. The forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion.
Until the 1970s or so, currency trading was limited mostly to the needs of large companies conducting business in multiple countries.
Trading for investment and speculative purposes was not widely practised at this time, and most trading was centered on commodities and individual stocks.
After World War II, economies in Europe were left in tatters.
To help these economies recover – and to avoid mistakes made in the wake of the First World War – the Bretton Woods Accord was convened in July 1944.
Several resolutions arose from Bretton Woods, but it was the "pegging" of foreign currencies to the U.S. dollar that arguably had the greatest immediate impact on the global economy.
By pegging (or linking) these currencies directly to the dollar, the value of the pegged currencies remained dependent on the value of the dollar.
At the same time, the value of the dollar was tied to the price of gold which, at the time of the Bretton Woods Accord, was valued at $35 an ounce.
The U.S government was obligated to maintain gold reserves equal to the amount of currency in circulation, making the United States a true gold standard economy.
Just like stocks, you can trade currency based on what you think its value is (or where it's headed). But the big difference with forex is that you can trade up or down just as easily. If you think a currency will increase in value, you can buy it. If you think it will decrease, you can sell it. With a market this large, finding a buyer when you're selling and a seller when you're buying is much easier than in other markets, subject to available liquidity.