Throughout history, the sale and purchase of goods and services created a need for currency exchange standards. By the 20th century, the value of gold was the most important factor that traders relied on to assess the value of one country’s currency versus another’s. American Express notes that in 1944, international financiers who recognized the importance of foreign exchange markets met and drafted the Bretton Woods agreement. This agreement helped to standardize international currency trading exchange rates or valuations.
Significantly, this new forex standard removed the value of gold as the basis for trading all currencies except the U.S. dollar. All other currencies traded on the foreign exchange at fixed rates against the U.S. dollar. Although this method of currency valuation no longer used gold as its standard, the value of the U.S. dollar remained tied to the value of gold. Therefore, the value of gold indirectly affected the value of all other currencies in the forex exchange system.
Modern Forex Trading Developments
By 1971, major world currencies abandoned fixed rates for foreign currency exchange, says Nasdaq. Widespread technological developments contributed to a shift toward online trading platforms and online brokers. International banks, investors and brokers all gained access to daily currency trading data with fewer delays.
During the first 10 years of the 21st century, forex trading options increased participation in forex markets. Deregulation of certain types of financial transactions also made forex trading simpler for smaller, non-institutional investors.
Forex Trading Meaning
Over time, the standardized terms for foreign currency exchange morphed into the shortened term of forex, meaning currency exchanging in both consumer and speculative or investment markets. These two types of forex trading differ in several ways. However, the common element between them is the potential for fluctuations that increase or decrease the value of currencies you trade for another.
Consumer Currency Trading
For the consumer market, foreign currency exchanges normally take place at a bank or airport kiosk during international trips. When you travel internationally, you need to be able to pay for hotels and certain small purchases with local currency in most countries.
Currency exchange rates fluctuate, and it’s almost impossible to know the value of your own currency until you try to exchange it overseas. If you don’t exchange currency in advance, you’ll buy the currency of the country you’re visiting at the rate set by forex activity that day. If you use your credit or debit card in a foreign country, your home bank also uses the forex rate to calculate the rate that you’re paying in your own currency.
Read More: Foreign Exchange Restrictions
Speculative Currency Trading
Currency trading for profit is somewhat like buying and selling stocks. Although this market is public, unlike with some stock trades, you must use a forex broker to take part in this investment. Licensed brokers offer accounts that allow you to invest in almost any currency, and you can have more than one forex account. With multiple electronic trading options, forex trading for beginners is only a mouse click or palm swipe away.
Read More: The Foreign Exchange Trading Process
Forex Trading Caveats
Currency trading doesn’t come with any FDIC insurance like your checking or savings account. War, natural disasters and even shady brokerage firms could cause the profit you expect from your forex investment to turn into losses or debts. Forex regulations do little to protect you against unanticipated currency fluctuations. Trades take place 24 hours a day in markets worldwide. This makes monitoring risks essential to successfully investing in this market.
Read More: Pros & Cons of Foreign Exchange Markets
Carol Luther has published feature articles in print magazines, ghostwritten blogs, and produced digital content since 2007. She has published personal finance and small business articles for the Houston Chronicle, Mahalo, the Nest, USA Today, Wahm, and Zacks. Carol has designed, implemented and managed multi-year, multimillion-dollar domestic and international projects services for higher education, nonprofits, and small to medium businesses for more than 20 years.