Know Your Forex History!

By the end of World War II, the world was in chaos, so the largest Western governments felt the need to create a system to stabilize the world economy.

This agreement, known as the Bretton Woods System, established the exchange rate for the US dollar against gold. This allowed all other currencies to be pegged to the US dollar.

This stabilized the exchange rate for a while, but as the world's major economies began to change and grow at different rates, the rules of the system soon became outdated and limited.

Bretton Woods

Soon after, in 1971, the Bretton Woods Agreement was canceled and replaced by a different monetary value system.

As the United States was put to the test, the foreign exchange market was free to move with exchange rates that were driven by supply and demand. Determining a fair exchange rate was difficult at first, but with advances in technology and communications, it eventually became easier.

At the beginning of the 1990s, thanks to computer fanatics and the explosive growth of the Internet, banks began to create their own trading platforms.

The platform is designed to stream quotes to clients, allowing clients to immediately execute trades on their own.

Meanwhile, some smart business-focused marketing machines have introduced internet-based trading platforms for individual traders.

These organizations, known as “retail forex brokers,” have made it easier for individuals to trade by allowing small trades.

Unlike interbank markets, where the standard trade size is 1 million units, retail brokers only allowed individuals to trade 1000 units!

Retail Forex Brokers

Before retail forex brokers, only large speculators and high investment funds could trade currencies, but thanks to retail forex brokers and the internet, this is no longer the case.

With virtually no barriers to entry, anyone can contact a broker, open an account, deposit some money and trade Forex from the comfort of their home.

Brokers generally come in two forms:

Market Makers, As the name suggests, market makers “manufacture” or set their own purchase and sale prices, and Electronic Communications Networks (ECN), who use the optimal purchase and sale prices available to other organizations.

Market Makers

Let's say you want to travel to France to eat snails. To trade in that country, you must first contact your bank or local foreign exchange office and earn a few euros.

In order for them to accept the other side of your transaction, you must agree to exchange your local currency for Euros at a price they have set.

As with all business deals, there is one catch. In this case, this happens in the form of a spread between the bid and ask prices.

For example, if the bank's bid/ask price for EUR/USD is 1.2000 and the ask (ask) price is 1.2002, the bid/ask spread is 0.0002.

Despite their seemingly small size, talking about millions of these Forex trades every day brings huge benefits to market makers!

Market makers can be said to be the basic building blocks of the forex market.

Companies participating in the retail market primarily provide liquidity by “repackaging” large contracts of wholesalers into smaller pieces. Without them, it would be very difficult for the average Joe to trade Forex.

Electronic Communications Network

Electronic Communications Network is the name given to a trading platform that automatically matches customers' buy and sell orders at quoted prices.

These quotes come from various market makers, banks and other traders using ECN.

Whenever a specific buy or sell order is placed, it is matched against the optimal bid/ask price.

Since traders can set their own prices, ECN brokers usually charge a very small fee for their trades.

The combination of narrow spreads and small fees usually makes ECN brokers' trading costs cheaper.

Of course, knowing the big companies is not enough. As Big Pippin said, “Trading requires timing.”