In order to develop a full understanding of forex trading and why it is even possible, you need to understand a little bit about the history of money. In early human societies, goods were traded for goods. If you had anything that was of value to someone else, then you had currency. While this system worked reasonably well for thousands of years, there were also some obvious drawbacks.
As communities began to grow and trade with each other, they found that it was hard to place a determinate value on each good. It also became apparent that more than one party needed to be involved in some trades to make them profitable and beneficial for each party. The modern system of money, and eventually forex trading, was born out of the answer to this problem.
The ability to equate value with an object that was otherwise useless was the first real step towards developing currency. If you think about it, the $20 piece of paper in your pocket has no inherent value; it's only valuable because the government says that it is. That was the challenge that these early cultures faced. How to determine what had value, and how much value, was a question that took many generations of development to work out. At the heart of forex trading are the solutions that they developed.
Forex trading involves the exchange of two base currencies. Anyone can do this. The point of trading foreign exchange currency is to make money though, so it must be done with some planning. The ability to predict the world economy and realize that at some point in the future, the value of the foreign currency that you just traded for must go up is what separates good investors from those who go broke.
Forex trading involves a cross. The cross is formed by the two currencies being traded. There are a few currencies that are considered majors. These are the largest players on the world stage and make up the majority of crosses traded. A few examples of majors are the U. S. Dollar, the Euro, and the Yen. Each of these currencies, and the economies that they represent, set the stage for and the value of the rest of the world's currencies.
Finding a stable standard of value is what makes forex trading profitable. If one nation were to decide suddenly that their currency held no value, then the market would collapse around it. Perhaps this is why the six nations that make up the majors are the most widely traded. Their economies have proven to be stable and the value of their currency is strong. People have agreed that currency is worth something and in fact, worth having. That is the basic operating principle of finance and it is the driving force behind what make foreign exchange trading profitable.
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