definition – currency exchange:
A currency exchange is a physical or electronic venue to exchange a currency for another. As per Cambridge dictionary – “currency is the state of being commonly known or accepted, or of being used in many places”. The word “currency” derives from the word “current”. So, like a river current or electric current, it refers to flowing nature of money.
Currency is standardised, which means one dollar in my hand is no different to the dollar in your hand. But one euro in my hand is different to the dollar or pound sterling in your hand. Hence the need for a currency exchange.
A more general definition is that a currency is a system of money in common use, for people in a sovereign country. Under this definition, U.S. dollars (US$), euros (€), Japanese yen (¥), and pounds sterling (£) are examples of currencies. Trading between nations requires international currency exchange markets. While, the currency exchange rate is the relative value of each currency.
history of currency exchange
metal coins
Currency exchange has it’s roots in barter-system, where people used to exchange goods or a service that they could offer, for goods or a service that they required. However, problems arose with this system, when people did not want what the other person had to offer. Imagine buying a hammer from a blacksmith and offering him a leg of lamb, only to find that he is a vegetarian.
To solve this problem, a commodity based money system was invented. Using basic items that everyone used on a daily basis as currency. However, due to the cumbersome and also often perishable nature of commodity money an alternative was needed. Around this time metal objects started to be utilised. These metal objects began to get more and more refined.
Around 500 B.C. coins were first manufactured in China, India and Lydia (Turkey). Other western empires (Greek, Persian, Macedonian and Roman) were soon minting their own series of coins with specific values. Metal was the obvious choice. It was readily available, easy to work with and could be recycled.
papernotes
In the middle ages, money was evolving into representative money, with the introduction of paper currency and non-precious coinage. Consequently, what money itself was made of, no longer had to be very valuable. Representative money was backed by a government or bank’s promise to exchange it for a certain amount of silver or gold. For example, the old British Pound bill or Pound Sterling was once guaranteed to be redeemable for a pound of sterling silver.
Some of the earliest known paper money dates back to China, where the issue of paper money became common from about 960AD onwards. Then 900 years later, from March 10-1862, the US started printing paper bank notes. The denominations were $5, $10, and $20. They became legal tender by Act of March 17, 1862.
US, then revised the gold standard after the economic crisis of 1930s. This was the first step in ending the relationship altogether. In 1971, the gold standard was replaced with national debt. Other major world currencies followed and fiat currency became the norm. Thereafter, currency was backed by the state and not redeemable for gold. The currency exchange rate was determined by interest rate and inflation rate parity.
plastic money and digitisation
In 1950 The Diners Club issued their first credit card in the United States, a method of paying in restaurants using credit. American Express released their first credit card in 1958. In 1971, the fixed rates of exchange based on gold standard came to an end. The currencies then became free-float.
With the introduction of computers in banking in 1980’s and 1990’s, currency exchange was done electronically instead of telephone quotes. This enabled high liquidity currency exchange markets. In addition, it provided the means to be able to see live FX quotes around the world in real time.
In 2009, Satoshi Nakamoto released the first Bitcoin client and issued the first Bitcoins. Bitcoin is a crypto-currency relying on cryptography to protect against counterfeit production. Individuals can “mine” Bitcoins by setting up their computers to solve complex maths problems that benefit Bitcoin.
trading in currency exchange markets
The currency exchange market is open 24 hours a day. And five days a week across major financial centers across the globe. This means that you can buy or sell any currency at any time during the week and have live exchange rates available.
Historically, only governments, large companies, and hedge funds engaged in currency exchange trading. However, in today’s high speed internet world, trading currencies is easiest than it has ever been. Many investment firms, banks, and retail forex brokers offer the chance for individuals to open accounts and to trade currencies.
size of forex (FX) trading market
FX trading volume is generally very large. As an example, trading in FX markets averaged $6.6 trillion per day in April 2019, according to the Bank for International Settlements. However, there is no centralised global currency exchange.
Currency exchange markets are located around the globe. The largest currency exchange markets are located in major global financial centers. Such as London, New York, Singapore, Tokyo, Frankfurt, Hong Kong, and Sydney.
key terms used in currency exchange trading
forex (FX) pairs and quotes
Currency exchange quotes are made in pairs, such as EUR/USD or USD/JPY. So, these represent the Euro (EUR) versus the USD and the USD versus the Japanese Yen (JPY) respectively.
Each currency pair has an exchange rate, such as USD/CAD: 1.2588. This means that it costs 1.2588 CAD to buy one USD. If the currency pair exchange rate increases to 1.3340, then it now costs 1.3340 CAD to buy one USD. So, USD has increased in value (CAD decreased) because it now costs more CAD to buy one USD.
forex (FX) spot transactions
A spot transaction occurs when you exchange one currency for another at current rates. The settlement period is two business days for most currency pairs. The business day calculation for currency exchange excludes Saturdays, Sundays, and bank holidays in either currency of the traded pair. Note that when trading CFD’s on your broker account, it is not a SPOT transaction. CFD is a derivative product. Therefore, SPOT settlement period is not applicable.
forex (FX) rollover
Retail traders don’t typically want to take delivery of the currencies they buy. They, generally intend to profit from the difference between buying and selling exchange rates of the currency pair. So, most retail brokers will automatically “rollover” fx positions at 5 p.m. EST each day.
The broker will then reset the positions. He will then calculate and provide either a credit or debit for the interest rate differential between the two currencies. The trade carries on and the trader doesn’t need to deliver or settle the transaction. So, the profit or loss is the difference between original transaction price and closing price. Moreover, the rollover credits or debits could either add to this gain or deduct from it.
forex (FX) futures
FX future is a standardized futures contract to buy or sell currency at a set date, time, and contract size. As the currency exchange rate moves, the value of the futures contract also changes. The contract size depends on the exchange and the currency pair. For instance, CHF/USD contract has a contract size of 125,000 Swiss francs, and the tick in this case is $.0001 per Swiss franc increments or $12.50/contract.
However, most speculators don’t hold forex futures contracts until expiration. This is because that would require that they deliver/settle the currency the contract represents. Instead, speculators buy and sell the contracts prior to expiration, realizing their profits or losses on the transactions. The profit or loss will depend on the currency exchange rate at the time of trading.
final comments
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this to trading
STOKAI provides daily prediction using algorithms based on all factors that impact currency exchange rates. And evolves this over 10 days in the future. Tutorial and brief user guide is available here – Tutorial. If there are any issues, please contact our customer services team.
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.