Forex trading has got to be the biggest financial market in the globe today. However, this was not always the case and just like everything else, it grew over the years. Given the larger scale today, trading through Forex or even CFD should take into account what happens in the world today as this heavily affects the currency prices that traders would transact. The use of the Gold standard did not happen until 1871 and is considered the turning point of Forex trading today. Let us take a trip back into the origins of Forex trading.
There was a time when there was no existing international system for currency and most if not all countries would use Silver or Gold as usage for payments. Notes would be used like the British banknotes and used for exchange at the Bank of England and would be converted to 10 pounds of Sterling Silver. Given this, the value of Gold and Sterling Silver was heavily influenced by the trade of different countries. Most international trades would occur through Gold as payment for exported products while some would transact but with lower Gold reserves given trade deficits in payment for imports from other countries.
The Gold Standard
There was already volatility of this method of transaction between countries and most would gain from a low inflationary environment. In lieu with this, the Gold standard was designed to ensure that the currency conversions would amount to a specific number of Gold. Countries would ensure that there is a reserve of Gold to back up their currency and most of them, especially more developed economies, would have a large Gold reserve to support the exchanges of currency back in the day. In a nutshell, the exchange rate was based on the price difference of an ounce of the available Gold between the trading currencies.
Modern Day Exchange rates
- Dollarisation – specific countries like El Salvador and Panama, would use the American dollar as their national currency, which is obviously a foreigh currency from the US.
- Pegged – Countries like the Hong Kong Dollar and China’s Yuan are prime examples of these as Pegged rates are directly linking the country’s currency exchange rate to a different country’s.currency. As mentioned, the 2 currencies are linked to the USD while countries like Denmark use Krones as a link to Euros
- Floating – This pertains to an exchange rate of currencies that are reliant on the supply and demand. Having such would have a fluctuating effect. However, this can still be regulated by Central banks that can ensure that fluctuations at extreme rates are controlled. This can be done by banks buying or selling their country’s currency just to control the pricing.
Before, the Forex and CFD market would have a majority of commercial and central banks or huge international financial institutions as participants. However, thanks to the progress of technology and accessibility heavily influenced by the internet and support of carrying out transactions using it have encouraged the fruition of retail traders.These are traders that are able to engage in trading at a smaller scale compared to what was offered to bigger entities from the past. Most Forex brokers are now available to transact online based on the prices available from the financial market which can either be done through Electronic Communications Networks.