Simply, foreign exchange is considered as an efficient medium of exchange for goods and services.
The barter system was originally used by our ancestors as a means of exchange. Bartering was inefficient as an exchange mechanism because a lot of time was spent negotiating to strike a deal. Also, much time was needed to search for the goods required for bartering. The barter exchange system was eventually enhanced by the public acceptance of standardized sizes and grades of metals like gold, silver and bronze for the exchange of merchandise. This metal currency for exchange had many advantages including durability and storage. During the middle ages, a variety of paper IOU's started gaining popularity as a medium of exchange.
Throughout the years, people began to realize that carrying around paper currency was a lot more advantageous than carrying heavy bags of precious metals. Consequently, stable governments eventually adopted paper currency and backed its value with gold reserves. This led to the birth of the gold standard. On July of 1944, the Bretton Woods Accord pegged the US Dollar to gold at a price of $35 per ounce. The Bretton Woods Accord also fixed other foreign currencies to the dollar. It lasted until 1971, when US President Nixon let the dollar "float" freely against other foreign currencies and suspended the conversion to gold.
As we fast forward to the present, the foreign currency exchange market has grown into the largest financial market in the world, with an aggregate daily volume of US 3 trillion dollars or greater. Even though foreign exchange has traditionally been an institutional (Inter-Bank) market, the growth of the internet has propelled online currency trading among private individuals to the stratosphere and widened the retail currency trading market considerably.
The foreign exchange market (Forex or FX for short) is one of the most exciting, fast-paced markets around. Until recently, Forex trading had been the domain of financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily with the click of a mouse through online brokerage accounts.
Daily currency fluctuations are usually very small. Most currency pairs move less than one cent per day, representing a less than 1% change in the value of the currency. This makes foreign exchange one of the least volatile financial markets around. Therefore, many currency speculators rely on the availability of enormous leverage to increase the value of potential movements. Higher leverage can be extremely risky, but because of round-the-clock trading and deep liquidity, foreign exchange brokers have been able to make high leverage as an industry standard in order to make the movements meaningful for currency traders. Extreme liquidity and the availability of high leverage have helped to spur the market's rapid growth and made it the ideal place for many traders.
