As a new trader, you might have an idea of the major market players of the Forex. Learning about the market players is not enough. To become a skilled trader, you must know the history of Forex. Unless you know about the ins and outs this market, you should never consider yourself as a professional. So, let’s dive into the details.
Birth of Forex
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The launch and collapse of the Bretton Woods System
After World War II, all of the western countries were devastated. They were economically weak. They felt they needed a universal system of exchange to trade with other countries for resources which were essential to helping their economy prosper.
Thus, the establishment of the Bretton Woods System came into the world. It was a simple system of economic measurement, which encompasses the idea that the country’s wealth will be measured in the stock of gold. Thus, the more gold a country has, the richer they are. All the countries started to exchange their currency in terms of gold and the US assisted in converting their currency into gold bars at a standard exchange rate.
But this system soon collapses, after 1971, when the currency of other countries was much larger than the US stock of gold. As a result, Bretton Woods System collapsed.
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Launch of Forex
The advancement of technology and communication made it much easy for the world to exchange its currency. In 1902, FX was introduced to the world. But it was only limited to the world’s super banks. Similarly, many businesses minded groups established different types of a machine (Electronic Communication Network) which could make the FX market open for the general people that is you and me, retail traders. Where the super banks trade on million units, we, the retail traders, trade on 100 units! This all happened because of the establishment of internet-based trading platforms.
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Market Makers
Imagine you have gone to Europe for your vacation. You are very hungry and you want to buy a hamburger from a nearby shop. What you will do? First, you will go to a currency exchange shop to exchange your dollars for euros. Think of the trader’s buying price of euro is 1 dollar and selling is 1.2 dollar, this difference might not make much to you. But in Forex, where trillions of dollars are flying in every day, this small amount is what allows the market makers to make millions of dollars. Here, the market makers are the exchange shop that set the price of a dollar in euros.
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Electronic Communication Network
This system is also known as ECB. This is an automated system of trade. This ECB system allows you to close your trading when it has reached a certain point set by you to make a profit or to make stop losing money. The price that you make, is compared with thousands of market makers, banks to make a profit for you. If it could not make a profit, there is a point set by you to stop losing money. The introduction of the Electronic Communication Network helps retail traders to make their money.
Due to this ECB system, retail traders can execute trades in their CFD trading platforms and make a decent profit from their smart devices. In short, you get unique access to the global trading industry without living in the home.
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Retail Brokers
After all this history, you can understand what is meant by retail traders. Yes, that is you and me. They are divided into two types.
- The Market Makers are those who set the price of exchange. Think of the exchange shop in Europe of your exchanging currency. That trade shop is the market maker.
- The Electronic Communication Network is a system that uses the limit set by traders to make a profit from different institutions that are present in the interbank.
