The History of Forex Trading

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Understanding the origins and challenges of forex trading can provide traders and those looking to begin their training with some insightful information.

Although Forex is a relatively new trend, especially given its reliance on technology to execute, trading for monetary benefit is far from new.

The Start to it All

Now, the start to barter and trade has been around for thousands…that’s right…thousands of years. This back-dates to the years far beyond B.C.; if anyone had something you didn’t, but had something to offer in return at a value that could be greater to the recipient a trade could be made.

The first Forex market was established in Amsterdam about 500 years ago. This foundation created the possibility to freely trade currencies whilst still having a stabilised currency exchange rate. Granted, at the time trading was not close to what it is today, but rather was mostly with England and Holland. From this starting point in Amsterdam, Forex trading was able to take a foothold throughout the entire world.

From here, fast forward to the 1800s when the currency began to be backed by gold, so some weight was able to be held against money rather than the long lost system of trading simply good for good or good for service. The establishment of the gold standard was one of the biggest stepping stones to modern trade for Forex and other forms of trading.

By World War One control over international trade took a fall and the war itself caused many countries to abandon the gold standard. This meant by 1913 foreign exchange holdings increased by 10.8% and holdings of gold increased by only 6.3%, marking the importance of the emerging Forex market.

One more quick jump and we can find ourselves in the early 1900s where the weight of gold against currency fell some, so countries began trading with and against one another and converting currencies received to gold. By 1913, the number of Forex trading firms rose from 3 to 71 within only 10 years in London. 50% of all Forex transactions were made in Pound Sterling.

Through the Decades

After the start of the 1900s, currency trading continued to evolve and progress. This includes multiple different trade systems being established as the value of currencies shifted.

After World War Two, there was a need for some drastic change within the world of trade and currency. This ultimately led to the Bretton Woods System. As this was developed it then made it possible for any currency to be pegged against the US dollar.

The Bretton Woods System- The 1970s

A hop, skip, and a quick jump forward, we arrive in the 1970s. At this time, at least in the United States, the concept of free-floating currencies took a foothold in the market. This allowed for the modern Forex trading system to develop.

The Bretton Woods system was created in the ‘70s and with that, a certain amount of rigidity in foreign exchanges, and the gold-backed US dollar began to give way to its own challenges. The Bretton Woods System held onto the gold-backed system of value in a limited form. USD would then remain on the gold dollar. This system also set that major world currencies would be against the USD at a rate of 35 USD per one ounce of gold.

USD was used as the standard because during World War 2, many countries fell victim to counterfeit. Prior to USD reigning supreme, the GBP was what was used as a standard measure of value. Unfortunately though, Great Britain ended up taking a massive hit from counterfeit currency by the Nazi counterfeiting.

This system lasted for more than 25 years. The Bretton Woods System then allowed nations to trade with greater confidence and stability. Additional benefits to this system included forming the International Monetary Fund, setting fixed exchange rates thus allowing currencies to fluctuate within a 1% range, and USD was then recognized as the world’s primary reserve currency.

Scandals in the ’90s

Ah, welcome to the ‘90s. Specifically, in 1996 the first online brokers entered the stage for trade to begin in a new way. Now, the stock market existed long before this, so we already know that currency trading already did exist. An issue here was that before the large technology boom trading was not a simple, quick action. But, with the introduction of computers, trading could then be done instantly. This did not come without some initial hiccups though.

One scandal was in 1995 involved a man that caused the collapse of the British bank Barings. He was based in Singapore and was making unauthorized speculative trades on the Japanese stock prices and interest rates. At this time the Kobe earthquake struck and caused the Asian markets to crash. The bank ended up losing more than $1 billion USD. Barings was forced to declare insolvency and the man was eventually jailed for 4 years for fraud and forgery in Singapore.

Another scandal with Forex was a few years before around 1992. A Malaysian bank landed itself in hot water and caused a loss to the tune of 30 Billion RM. At the time, the bank involved was supposed to be one of the most sophisticated in the world and attracted some major traders. There were highly abnormal trades happening at about $1 to $5 billion USD daily…even the bank of Japan did not trade at these levels. This was because central banks avoid high-level trading to protect its own internal currency. The Malaysian bank ended up becoming a profit center for the government using the country’s reserves to speculate in the currency market.

Some Big Swings

Through any investment type’s history, there are gains and losses and they follow a few different trends. Through the history of Forex, there have been a few monumental swings that have forever impacted the market.

2015 found a massive swing downward to hit the market. This happened in regards to some changes with Swiss monetary policy. Before this swing happened the CHF Franc held what was considered a stable and favorable value. Within three days of this change, the CHF France took a drop in value to the tune of about 41%. Clients ended seeing massive losses during this transition.

Another large swing occurred in 1998 and impacted those that borrowed yen against Russian bonds. This ended up causing a heavy drop in USD/JPY accounts to the tune of 2 yen a day for about a week. This occurred because during those bond investments, Russia ended up defaulting and liquidating assets.

Where We are Today

Forex today is a full digital trading experience. This market, unlike some other trading markets, is available 24 hours a day as it is spread through multiple time zones.

Forex has moved far beyond the Amsterdam phase of trading. Today there are four major types of trading pairs that can be done. Major pairs make up about 80% of the total market. There are also minor pairs, exotic pairs, and regional pairs.

It can be noted that exotic pairs and regional pairs tend to be more volatile as they are smaller economies and emerging economies that are often involved within them.

Different Forex Markets

Not only has Forex itself progressed in leaps and bounds, but it has also evolved into multiple market types. There are three different ways that you are able to trade. These include:

  • Spot forex market: the physical exchange of a currency pair, which takes place at the exact point the trade is settled or within a short period of time. Derivatives based on the spot forex market are offered over-the-counter by dealers like IG.
  • Forward forex market: There is an agreement to buy or sell a set amount of a currency at a specified price, and to be settled at a set date in the future or within a range of future dates
  • Futures forex market: an exchange-traded agreement to buy or sell a set amount of a given currency at a set price and date in the future.

Forex During the Pandemic

History has shown pandemics have happened, can happen, and more than likely will continue as is the nature of viruses and the other small things we can’t see. This means as with the rest of the world and other markets, pandemics (like COVID-19) have an impact on the Forex market as well.

Using COVID-19 as an example, even in late 2020 this virus made a huge impact on all money markets and will continue to do so for a while.

Globally, unemployment has been a major factor in how the money markets have been impacted. As people grow insecure in regards to how much money they will have and ensuring they have necessities…investing can fall on the leeway as more of a luxury or desire rather than an absolute must. This then causes a drop seen across money markets as corporate debt rises and the desire for some currencies (like USD) to take a drop as a result.

Although an initial hit came across the board, Forex has recovered and maintained very well while the rest of the world has its varying impacts. Throughout Africa, Eastern Europe, and Asia during the pandemic new accounts here took up 60% of the nearly 220,000 new accounts opened by the end of Summer 2020. In addition to this, total trade volume also took a steep climb to the tune of about 300%.

Despite how well Forex has been able to perform against some of the other market aspects, the volatility and nature of why Forex improved so much do not mean that it will continue to grow at that rate. The nature of growth in the financial market is all about stability and security…if people grow less secure.

A Peek into the Future

The future is largely uncertain for many, but it can be predicted that Forex has no sure sign of stopping or slowing down. The way it currently sits, over \$5-trillion is traded on the Forex market daily. That’s right…DAILY.

The Forex market is also decentralised, so with that, it means that this is in no control of a central government or sole body. Granted, within the market, there are four main banks that contribute to forex; those being Citi, JPMorgan, UBS, and Deutsche Bank.

Some Famous Forex Traders

Going over the history of forex cannot be without mentioning some historic traders as well.

George Soros

George established Soros Fund Management in 1970. The firm has reportedly gone on to generate more than $40 billion in profits over the last fifty years. 

Soros rose to international fame in 1992 as the trader who broke the Bank of England, netting a profit of $1 billion after short-selling a reported $10 billion in British pound sterling. In 1992, the U.K. withdrew the currency from the European Exchange Rate Mechanism after failing to maintain the required trading band due to Soros’ trade. This event earned the name Black Wednesday. This trade is considered to be the highlight of his career and gave credibility to his title of one of the top traders of all time. Soros is in the ranks as one of the 200 wealthiest individuals in the world.

Stanley Druckenmiller

Druckenmiller then successfully managed money for George Soros and was the lead portfolio manager for the Quantum Fund between 1989 and 2000.

Druckenmiller also worked with Soros on theBank of England trade, which launched his rise to stardom. He was also featured in the best-selling book, The New Market Wizards.

Andy Krieger

Krieger joined Banker’s Trust in 1986 after leaving a position at Salomon Brothers. Krieger immediately built himself a reputation as a successful trader. Due to this, Andy had his capital limit increased with the company to $700 million. The standard for the company was a $50 million limit. This bankroll put him in a perfect position to profit from the Oct. 19, 1987 crash. 

Krieger focused on the New Zealand dollar because he  believed it was vulnerable to short selling as part of a worldwide panic in financial assets. His trading strategies allowed for a net of about $300 million in profits for Banker’s Trust.

Bill Lipschutz

In 1982, while working on his MBA, Lipschutz began working for Salomon Brothers and ended up in the newer branch that focused on foreign exchange. By 1985, Bill was able to successfully cause the company to earn $300 million on a yearly basis. This type of success was exactly why from the years 1984 up until 1990, Bill was the company’s main Forex trader. After that, Bill moved onward and in 1995 he became the Director of Portfolio Management for Hathersage Capital Management.

Bruce Kovner

Kovner was a fairly experienced investor beyond just Forex. A notable point is him being able to bank around $20,000 from soybean future contracts. This event led to him then becoming established as a trader and joining the Commodities Corporation and booking millions as a result.

In 1983 he also ended up founding Caxton Alternative Management. This hedge fund system was then able to be worth more than $12 billion in assets. This success ended up allowing Bruce to be one of the largest Forex players up until 2011 when he retired.

To Continue Onward…

Forex does not appear to be shifting in any negative direction in terms of popularity. Skilled investors and market shifts will forever impact the investing game. Who knows, maybe if you follow some key steps as an investor you can find yourself among some top ranks.