Now time history of forex.
Previously you might have learned what is forex, how to structure forex, who is the forex market participant.
This time we will learn about the history of forex, indeed this is not related to increasing your trading skills.
But as a trader, it would be better to know the beginning before online forex trading as it is today.
Forex, too, undergoes a process of growth, just like you were when you were born from the mother’s womb.
You will experience a miraculous growth phase from kids until now that you become an adult.
Considering the global nature of the currency market.
The history of forex cannot be separated from the development of the modern world economy and its evolution from the barter method in the primitive era.
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Barter system history
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In part history of forex primitive era
In the primitive era, in the history of human civilization, people exchanged goods by barter.
Barter system definition is to exchange goods with other goods.
Barter system with an example, corn with apples, goats with rice, as long as there is an agreement between the two parties they can make a barter.
This is a common thing for them to do because they do not yet know an easier way to exchange goods.
However, over time, this barter system experienced many difficulties, this is a barter system disadvantages.
For example, a person needs rice, and he has a goat who wants to be exchanged for rice.
But the owner of the rice does not need a goat, so they cannot barter.
Another case is when someone needs rice.
But he does not find anyone who has rice, so he cannot exchange his goats because there is no item he needs.
The kingdoms of that era began to print “money” each by determining the value of certain precious metals in it.
And exchange is based on these levels.
This was the beginning of the exchange of currencies in the primitive era.
The gold standard monetary system
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In part history of forex gold standard monetary system
Because the barter system experienced many difficulties in exchanging goods.
People then began to think about how to get the ease of exchanging goods.
Gold Standard System or the gold standard financial system was created in 1875.
It was the most important event in the money market history.
Before the gold standard was created, countries in the world generally used gold and silver as international payment instruments.
The main problem with the use of gold and silver for payment instruments is.
That the value of these two precious metals is greatly influenced by global demand and supply.
The idea underlying the creation of this gold standard system is.
That the government guarantees the exchange rate of a currency against a certain amount of gold, and vice versa.
In other words, a currency is backed up by a certain amount of gold.
Thus it is clear that the government needs a sufficient amount of gold reserves to meet the demand for currency exchange.
During the late 19th century, all developed economies had pegged a number of currencies worth one ounce of gold.
The collapse of the gold standard system
Over time, the price difference between one ounce of gold between two different currencies becomes the foreign exchange rate between the two currencies.
This became the initial definition of foreign exchange in history.
The gold standard lasted until the beginning of World War I.
Because of rising tensions with Germany, European countries feel that they must complete large military projects.
So they started printing money to finance the projects.
The financial burden of these projects is so large that there is not enough gold to back up the large amounts of money printed and cause inflation.
After World War 1 was over, several countries re-implemented the gold standard system.
But most countries returned to “broken” the system at the beginning of World War II. Even so, gold is still the best foreign exchange reserve.
Bretton woods system
Towards the end of World War II, the Allied nations put forward the idea that they needed to build a monetary system to fill the gap caused by the abandonment of the gold standard system.
Starting from the idea finally in July 1944, more than 700 Allied representatives held a meeting in the United States. Precisely at Bretton Woods, New Hampshire.
They held the meeting with the aim of an agreement that many people know as the Bretton Woods System as a form of international monetary management.
At the meeting, there were three important things that became the main decision.
- A method with a fixed foreign exchange rate.
- The US dollar replaces the role of the gold standard as the main reserve currency.
- The establishment of three international bodies to monitor world economic activity: the International Monetary Fund (IMF), the International Bank for Reconstruction and Development, and the General Agreement on Tariffs and Trade (GATT).
The main result of the Bretton Woods system is that the USD replaces gold as the main standard of exchange rates for world currencies.
The collapse of the Bretton woods system
Furthermore, the USD is the only currency in the world that will be protected by gold reserves.
This is what later became the main problem of the failure of the Bretton Woods system.
After 25 years, the Bretton Woods system faced several problems.
In the early 1970s, the United States (US) gold reserves were so small that the US Treasury did not have enough gold to finance all the USD owned by the central banks of the countries in the world.
Finally, on August 15, 1971, US President Richard Nixon adopted a policy of refusing all requests to exchange the USD for gold.
This is the end of the Bretton Woods era.
Although the Bretton Woods system did not last long, it left a history that still has a significant impact today.
The Bretton Woods system left three institutions formed at the time.
- The IMF
- Bank for Reconstruction and Development
- GATT, now to be a World Trade Organization (WTO).
What about international currency exchanges?
The exchange is still ongoing with reference US Dollar which has been boosted prestige by the Bretton Woods System.
Then at the end of 1973, the volume of supply and demand governed the value of the currencies of industrialized countries with the adoption of a floating exchange rate system.
Exchange rates change every time. high volume, speed of change, and volatility continue to increase, so that new financial instruments, new market models, and market liberalization also appear.
Online forex trading
When a currency uses a floating exchange rate, transactions of the main currency are carried out by banks; while other parties such as the government and companies contact banks as intermediaries.
Companies that need money will contact the bank via telephone, then the bank records at what price currency is bought or sold.
From this, the interbank market is created as an over-the-counter network where currencies are exchanged and currency exchange rates change dynamically.
The rapid economic and technological development of the 80s to 90s brought the world to a new development in the history of forex trading.
Where not only governments and large companies could participate in a world that was previously dominated by large banks and international scale companies, but the individual also has the opportunity to trade forex.
Transactions through banking intermediaries no longer have to be initiated by telephone contact, but rather by instructions via the internet.
With the creation of a trading platform so anyone can see the development of currency exchange rates and make buying and selling in real-time.
The development of technology is an important point in the history of forex trading.
Because it pushed the trading volume in the forex market shot up to become the largest financial market in the world with daily liquidity reaching USD5.3 trillion in 2013.
And this is an opportunity for retail traders to make money from forex by learning which currencies provide the potential for easy profits, and when is the best time for forex trading.
Retail forex broker
How can we as ordinary people with low capital benefit from currency exchange?
Now, this has emerged the “forex broker” that serves currency trading for the community on a small scale.
Retail brokers provide the opportunity to trade with a contract size of only 1000 units, while for a standard contract with one million units.
Retail forex brokers like this facilitate the public to trade forex even with a small capital of 10 $ only.
Even more sophisticated in the current era of mobile phones, forex trading can be via a laptop, tablet, android, or iPhone.
Brokers basically fall into two categories, namely market makers and electronic communication networks or ECNs.
Market maker broker
When you go to another country, Europe for example, you need euros in hand to buy and sell goods in that country.
Then you going to a currency exchange place because you will buy Euros then by the exchanger it offers a certain price for you, if, for example, the current price is 1.1000, by the exchanger it offers to you at the price of 1.1003.
This difference in 0.0003 is the profit exchanger.
Market maker brokers are also similar to this, they offer to sell and buying prices according to their conditions, and are different from the actual price.
The market maker broker itself is also divided into two, namely dealing desk and non-dealing desk.
Dealing desk broker
Dealing Desk (dealer) is a broker that opposes the trader’s transactions so that if they lose.
The broker gets to profit from the trader.
Usually, this type of broker limits an aggressive trading technique and also many rules.
Besides that, they use a fixed spread method.
And also this type of broker can have a fantastic welcome bonus such as 30%, 50% even 100%, which according to logic it will not be possible to obtain profit from the spread only.
Then other bad factors are prone to market manipulation or engineering factors.
Non-Dealing Desk broker
Non-Dealing Desk or Risk Desk gets its main income from the difference between buying and selling prices or spreads.
These type brokers are not against their customers but they only gather traders as their customers.
This type of broker is only a bridge between traders and interbank markets, they will throw client orders to liquidity providers.
But the broker can also participate as a Participant or as a Trader in the market as well.
Depending on the broker’s management company policy, this they do to increase profits.
Non-Dealing Desk same with Risk Desk because this broker transfers risk to its liquidators or the market.
They do not fight and do not intervene in customer transactions.
So the broker is not at risk with losing trading as can happen at dealing desk brokers..
And this type of broker only takes profit from the difference between the bid and ask price, not from the customer’s loss or from the customer’s margin.
Non-Dealing Desk Market Maker brokers consist of ECN, STP and DMA, and Hybrid brokers.
Electronic Communications Network
Electronic Communication Network, or more popularly known as ECN, is an electronic system to bridge forex traders to be able to jump directly into the liquidity market.
Meanwhile, the ECN Broker is a forex broker that uses ECN to provide direct access to the currency market to its clients.
In ECN brokers are not brokers who determine the prices listed on our trading platform, but the price is already formed in the market.
So if the market price is 1.1000 then that is the real price and there is no bid and ask price as in the market maker broker.
Banks, financial institutions, the private sector, the government, as well as retail and institutional investors are the parties involved in forming these prices.
ECN brokers get profit from the commission made by traders, which are usually in small amounts.
But usually, the initial capital for trading with ECN brokers is greater than the market maker broker.
If on a market maker broker you can trade with 1 $ but if trading with an ECN account at least 100 $.
The history of online forex trading has started in the 1980s until now after the development of the internet and technology began rapidly.
And until now this development has added a new type of market, the crypto market.
In the future, it is possible that new trading methods will continue to develop with more sophisticated systems.