The History And

Advantages Of FX Trading

Windsor Advisory Services

 Introduction
Foreign exchange is simply the mechanism which values foreign curren-
cies in terms of another currency. An exchange rate is, therefore, the price
of one currency in terms of another.

A Brief History

Although the business of

changing money is
probably as old as money
itself, foreign exchange
dealings in their present
form date from the late
nineteenth century. It
was then that there
emerged after a process
of development lasting
more than a hundred
years, a monetary
system using gold alone
as its reference, instead
of gold and silver. The new monetary system gradually superseded the
“Latin Monetary Union” founded in 1865. Condence in the new system
grew and it was adopted throughout the world. This led to the practice of
settling international payments by debiting or crediting a foreign account
rather than by an actual transfer of precious metal. With the introduction
of the telegraph, telephone and teleprinter, the technical means were
at hand for the establishment of international exchange dealings on a
professional basis. “The Gold Standard” which existed up until the end of
1918 established a system of xed exchange rates whose parities were
set in relation to gold. In theory money could be exchanged for gold
at anytime at the bank of issue. The enormous nancing requirements
during the First World War could only be met by the creation of money.
Differing ination rates between one country and another provoked an
ever more obvious disparity between currencies.

In 1925 the Pound was overvalued by no less than 44% against the dollar.
Corrective action was taken by many countries in terms of devaluation
to bring currencies back into line with others. The international monetary
system was further disturbed in the recession of the thirties as countries
introduced exchange controls to limit the export of capital. Those countries
that did not have exchange controls in the thirties were forced to introduce
them with the outbreak of World War Two. As the war drew to a close
the rst steps were taken to providing a free stable and multi lateral
currency system and the American proposal accepted at the Bretton
Woods conference in July 1944 harked back to the basic concept of the
gold standard, with all currencies valued against it. The system aimed
to eliminate existing exchange controls and bring about the convertibility
of all currencies. The International Monetary Fund (IMF) was set up and
countries seeking to devalue currencies by more than 10% had to seek its
approval. The huge economic, political and social changes of the sixties
made the system unworkable and it became apparent that currencies
needed to uctuate more than 10% against each other. In 1971 the
Bretton Woods agreement was at an end. It was superseded by the
Smithsonian and European Joint oat it increased the range of currency
uctuations but the pressure for free oating currencies increased and
in 1973 currencies became free oating by default, since it was the only
available option. Free oating however was not imposed. In other words
countries were and still are free to peg, semi peg or free oat their
currencies. In fact, only in 1978 was free oating ofcially mandated by
the IMF.

The Currency Markets Today

The volume of foreign currency transactions

has experienced huge growth since
currencies have been allowed to oat freely
against each other. While daily turnover was
US $5 billion in 1977, today this gure
has increased to well over $1 trillion and
continues to grow at a rapid rate. So what
is behind this spectacular growth?

Exchange Rate Volatility

After the demise of xed exchange rates few people envisioned the
volatility potential of currencies, people generally assumed that economic
forces would require only occasional small adjustments in an otherwise
quite and stable environment. This view was to be proved completely
wrong. The dollar for example soared in the eighties and after this rise
was over a 50% drop occurred in just two years. There are of course
many other spectacular rises and falls of similar magnitude that have
occurred since. Volatility not only attracts traders wishing to hedge their
foreign exchange exposure but also speculators’ looking to turn these
spectacular moves into prot.

Business Internationalisation

Business has become more internationalised and this trend accelerated

after 1989, as the demise after communism and the growth of South East
Asian and South American economies opened up world markets further.
These changes have been positive in that they have increased volume
as more transactional layers are added. Today, boundaries between
countries are more open than Competition has intensied between major
corporations who are now constantly trying to open up new markets
and nd cheaper raw materials and labour. As this internationalisation
increases further, so to does the volume of foreign exchange trading.

Developments In Communication

In the 1970’s most business was

conducted via the telephone, and
to a lesser extent the telex. Both
mediums were slow and prone to
errors. The introduction of automated
dealing systems in the eighties
allowed dealing via on line
computers. The growth of the
Internet followed and bought the
advantages of online dealing not just
to a few but everyone. This greater
access to information attracted a whole new group of players who were
previously excluded from trading Foreign exchange.

Growth In Corporate Interest And Speculators

The net affect of globalisation and increased volatility is to make

corporations look at minimising the affect of these uctuations on their
prots and hedge the risk. Speculators on the other hand, are attracted
to foreign exchange markets not to minimise risk but to try and make
prots from this volatility. The availability of the Internet has seen this
group grow dramatically over the last decade.

Why Currencies Are An Ideal Speculative Vehicle

Liquidity

Currencies trade 24 hours a day it is literally a market that never sleeps.

The liquidity of the markets allows traders to enter and exit a market in
seconds. This allows traders to maximise prots and minimise losses in a
market that allows them instant access.
Trending Nature

Because currencies tend to reect the underlying health of the economy

they tend to trend well. Periods of economic growth or recession are not
normally short term; they tend to last for years and in many instances so
do currency trends. This trending nature allows astute traders to catch
and hold the major trends for maximum prot.

New FX Instruments

The introduction of futures and options trading increased the exibility of

trading foreign exchange and opened the markets to a greater audience
of traders. With the advantage of limited risk and unlimited gains, as well
as a huge variety of strategies, the options market provides many traders
with the perfect trading vehicle.

Never A Bear Market

One of the biggest fears for the equity trader is the bear market. There
is no such thing in foreign exchange. As one currency rises another must
be falling and vice versa. Traders are therefore able
to make prots regardless of the economic outlook.
This is obviously a major advantage over traditional
investments such as equities, bonds or property.

An Opportunity For Building Wealth

The opportunities in trading foreign exchange are

immense and they represent one of the few areas
where traders can start with small stakes and build
wealth quickly. The potential is there for everyone
and our material is designed to help turn this potential
into prots.