Forex Trading: Definition, Advantages and Disadvantages

Forex trading today can indeed be regarded as a promising income field. How not, forex trading does not require large enough capital. In addition, it is not too complicated to use. For information, it is often found that forex trading players are those who have been in the stock trading world for a long time. Then, what exactly is the meaning of forex trading? And how does forex trading work itself? Here Robo Forex will give a complete explanation.

Understanding What is Forex Trading

Currently, maybe many people will say they can get rich quick if they play forex trading. However, this is not necessarily accompanied by an in-depth understanding of the meaning of forex trading itself, both in terms of characteristics, advantages, and risks. In the following explanation, we will discuss the basic understanding of forex trading that everyone must know. Then, what is forex trading?

Forex trading or also known as forex trading is trading currencies from different countries with the aim of making a profit. In this case, forex itself is short for Foreign Exchange or can be called a foreign exchange exchange. An example of forex trading would include buying Euros (the main European currency), while simultaneously selling USD (the American currency), which can be shortened to EUR or USD. In the minds of ordinary people, the meaning of forex trading is more on the activity of exchanging money at Money Changer, namely buying and selling foreign currencies manually which is done through a money changer. In fact, forex trading is actually different from manual transactions like in Money Changer.

Another term you need to know is trader. What is a trader? Trader or forex trader is a term for people who do forex trading who trade currencies from various countries.

Please note, the purpose of someone to buy and sell money in Money Changer is because of the need to exchange currencies to transact in different countries, so there is a physical exchange of money. As for forex trading, it is done online with the sole purpose of making a profit. It should also be understood, forex trading is a business activity, investment, it can even be considered a profession.

On an international scale, foreign exchange or foreign exchange trading is often carried out by various parties, ranging from the government, central banks, multinational companies, to certain individuals who have large amounts of assets or are big players. Currency buying and selling transactions that occur between various parties do not occur in a market with physical buildings, but in an invisible network called the “forex market”.

Along with the development of technology, forex trading has been able to reach a wider scope. Through the internet, forex trading can now be done by anyone, anytime, and anywhere. Nowadays, everyone can trade forex. You can also trade forex online easily and with a capital as small as 10 dollars.

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History of Forex Trading

In its history, forex trading at the end of the 90s, only the rich, large financial institutions such as central banks, private and government banks, and large commercial companies such as Apple or Toyota did this business. They do forex trading usually for trading purposes, paying debts, hedging (hedging), or investing. The capital required is also quite large, and not just anyone can do forex business.

After the development of the internet all over the world in the late 90s, the forex market was finally able to be followed by almost all individuals, from entrepreneurs to housewives, parents and young people. Brokers also began to structure forex so that it could be traded on a retail basis by each individual. So at this time, starting from money changers, banks, to motorcycle taxi drivers who hang out can also enter the Forex market.

1. The End of the Bartering Period and the Beginning of the Exchange of Money

In the history of human civilization, it should be noted that the exchange of goods between individuals began with a barter system. For example, someone needs a goat, then he meets another person who sells two baskets of apples, then they agree to exchange their merchandise, then a transaction can occur. However, over time, barter was considered insufficient to meet daily needs. The main problem with the barter system is what if you can’t find the person who needs and supplies the goods to exchange?

To overcome the shortcomings of barter, then made a means of payment or means of exchange in various forms. In this period, mankind used shells, beads, rare stones, and precious metals as intermediaries. However, it should be noted that each region can apply its own “currency” based on what they consider the most valuable, recognized by the community, and portable (easy to carry anywhere).

Because each region of the world uses a different “currency”, traders who transact between regions or cross-island and transcontinental voyages often need a currency exchange reference that is universally accepted. In many locations, it is agreed that the use of a precious metal such as Silver or Gold as an intermediary.

The kingdoms that stood at that time began to print “money” respectively by determining the content of certain precious metals in it. In turn, the exchange is based on that rate. This was the beginning of currency exchange in ancient times.

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Since when did this currency exchange take place? According to Byzantine records (circa 4th century BC) show that the kingdom monopolized the exchange of money. Then Papyrus records also show that currency exchange was done in the era of ancient Egypt. Other regions ranging from Australia, Indonesia, China, India, to Europe have their own records. So, this is not something that suddenly appeared in modern times.

2. History of Modern Forex Trading

Exchanging money has been going on since time immemorial, but the history of modern forex trading as it is today actually only started after World War II. For information, there was a lot of chaos and economic crisis at the end of World War II, so that the governments of the Allied countries felt they needed a system that would later be able to unite the global economy. Then the “Bretton Woods System” was formed to realize this dream.

In the Bretton Woods System, which was born in the city of Bretton Woods, New Hampshire, United States in 1944, for the first time there are official rules to regulate monetary relations between countries. The United States, which at that time held two-thirds of the world’s gold reserves, insisted that the system be based on gold and the US dollar. Finally, this system requires all countries involved to relate the value of their currency to gold and the US Dollar. However, it didn’t last long.

On August 15, 1971, the United States unilaterally severed its currency relationship with gold, thereby automatically ending the Bretton Woods system. The value of the dollar is no longer obtained from its gold reserves, but only from the promises of the US government. This action certainly makes the US Dollar a reserve currency for many countries in the World. At that time, the exchange rate between currencies was no longer determined by default, but by following a simple economic system, namely demand and supply. A new phase was born in the history of forex trading, namely the floating exchange rate system.

After that, currency buying and selling transactions are mainly carried out by banks, while other parties such as the government and companies need to contact banks as intermediaries. Companies that need it can contact the bank by telephone, then the bank records at what price a currency is bought or sold. This creates the interbank market as an over-the-counter network where currencies are exchanged and exchange rates change dynamically.

3. The Era of Online Forex Trading

The development of the global economy between the 80s and 90s then led the world to a new development in the history of forex trading in which people could participate in the world, which was previously dominated by large banks and international companies. Transactions through banking intermediaries no longer have to be initiated by telephone contact, but simply by instructions via the internet. In fact, a trading platform was created that allows anyone to see the “price” (currency exchange rate) and trade currencies in real-time.

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The development of this technology is a crucial point in the history of forex trading, because it pushed the trading volume in the forex market so far to become the largest financial market in the world with daily liquidity reaching USD 5.3 trillion in 2013. At this time too, you can find out which currency only those who are heavily traded and seek to profit from the strengthening or weakening of the currency exchange rate.

Then how when you as “ordinary people” can benefit from this currency exchange? Now there are many “forex brokers” who serve currency trading for the community on a small scale. In contrast to the interbank market which has a standard trading size (100,000 US Dollars per unit), this kind of forex broker provides public facilities for forex trading even with capital as small as a few tens or hundreds of dollars. Even more sophisticated in today’s mobile era, forex trading can be done via laptop, tablet, android, or iPhone. As long as there is an electricity and internet connection, you can “jump into the forex market” and profit from it, as long as you know how to play forex trading.

How Forex Trading Works

Forex trading is basically the simultaneous buying of one currency and selling of another. The currency pairs are then traded simultaneously. For example, EUR/USD = 1.23700.

The currency on the left (in this case the Euro) is the base currency, and the currency on the other side is called the quote currency. The notation above shows that 1 unit of the base currency is equal to 1.23700 of the quote currency (1 euro = 1.23700 USD).

That way, you have to pay 1.23700 USD if you want to buy 1 Euro. Conversely, if you want to sell 1 euro you have, then you will get 1.23700 USD.

Forex trading is a foreign currency transaction that is increasingly being chosen as a way to invest. This forex trading involves certain currency pairs as chosen and can be traded according to certain conditions to achieve maximum results.