Forex is the abbreviated form of ‘foreign exchange’. In common parlance, it means foreign exchange trading by speculators and investors. The foreign exchange market is a globally decentralized market where the relative values of different national currencies were determined.
Now, trading in currency exchange is a practice which started from the ancient times. With the expansion of international trade over times, the amount of currency exchange between different countries also increased exponentially. During the late medieval period, Amsterdam had a large foreign exchange market. The first investment bank in the USA, the Alex Brown & Sons, was a major player in the forex during 1850s. In global trade, gold and silver were traditionally used as methods of international payment. During the late nineteenth century, all of the major players in the international trade accepted the gold standard as the basis of calculating the exchange rate between different currencies. This is considered to be a major event in the history of Forex trading. The gold standard lasted till 1914 and returned for a brief period during the interwar years. Finally, the Great Depression of the 1930s forced many countries to abandon the gold standard.
Before the Second World War came to an end, the Allies met to implement a new system of fixed exchange rates that would be a better substitute for the now abandoned gold standard. The result was the Bretton-Woods Agreement of 1944. Under this pact, the rate of the U.S. dollar was fixed at $35 per ounce of gold and the currencies of all other signing countries were expressed in terms of dollars. Again, a huge increase in the amount of global trade during the 1950s, massive circulation of capital, destabilized foreign exchange rates, prompting the countries to finally discard the Bretton-Woods system in 1971. Finally, in 1973, the era of controlled foreign exchange trade came to its end, and it was replaced by a complete free-floating system, guided by the forces of supply and demand. One of the major advantages of this system is that it can correct imbalances in the national markets automatically and allows the nations to manage their own national economies through monetary policies in a more efficient manner. With this new system in place, new financial instruments were introduced, markets were deregulated. It was around the same time that computers slowly started replacing the telephones and telex used in the forex trading. With the increased use of computers and other technologies since 1980s, capital movement across the national borders have accelerated to an a great extent ensuring a great expansion of foreign exchange trading throughout the Asian, European and American countries.