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One of the main problems new traders have when they begin their journey down the education path to self-empowerment is that they skip the most important first step, how to properly “think” money and markets. Many of my articles deal with thinking about the trading side of the equation; everything from the mechanics of when to buy and sell to understanding the psychology of you and the person on the other side of your trade. Today, let’s take a walk through the history of one of the best trending markets in the world, Forex. It is an important first step in properly thinking the Forex markets, which is key when attaining an edge in anything we do. The more prepared we are, the more we understand, the better the results.

Strong economies tend to have strong currencies. When we trade the Forex markets, we are trading economies. Therefore, supply and demand for currency depends on the current and expected future health of a country’s economy. To keep things simple let’s discuss the chart just below. The way we value the health of a company when assessing a stock’s valuation is not all that different from how we value a country’s currency.

Lessons From The Pros

Foreign Currency (Forex) trading traces its history centuries back since before the Babylonians. While they were the ones credited with the first use of paper notes and receipts, forms of currency had existed for quite some time already. In the beginning, the value of goods and services was expressed in terms of other goods and services, also called “the barter system.” Limitations of this system were the catalyst for establishing more generally accepted methods of exchange.

Means of Payment/Reliable Storage of Value Evolution

Stones, Teeth, Feather Metals: Gold and Silver Governmental Paper Money

Lessons From The Prosthen…Lessons From The Prosthen…Lessons From The Pros

Before the First World War, most Central Banks supported their currencies with convertibility to gold. However, the gold exchange standard had its weaknesses of boom-bust patterns. As economies moved more and more to paper money not supported by gold, other problems arose. A greater supply of paper money without the backing of gold led to devastating inflation resulting in political instability.

Benton Woods

Agreement: July 1944 (end of World War II)

This agreement created a global currency system built on the US Dollar. The result was to fix the US Dollar at $35.00 per ounce of Gold and also fix other main global currencies to the US Dollar. This was initially meant to be permanent but things change. The system ran into trouble when national economies moved in different directions during the 1960’s. The system collapsed in the early 1970’s when US President Nixon suspended gold convertibility. At a time when the US was going through economic hardship, the US Dollar was no longer suited as the only international currency.

Forex Today

Over the past few decades, foreign exchange trading (Forex) has developed into one of the world’s largest global markets. Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjust foreign exchange rates according to their perceived values based on pure supply and demand for currency. The Candles on your trading screen represent the footprints of buyers and sellers. Each and every candle is created because of an ongoing demand and supply relationship. This order flow is driven by demand and supply for Currency based on people’s perceived value.

OTA Supply/Demand Grid and Market Screener: GBPUSD – 5/8/15

Lessons From The Pros

Notice on the chart above from last week of the GBPUSD, a supply level is identified in this market. When price comes back to this level, it declines strongly from that area. What is key to understand is, any and all influences on price are reflected in price. We don’t need to focus on or consider the economic influences on price in this market because all those influences are reflected in price and seen on the chart.

At the end of the day, this all comes down to objectively quantifying demand and supply when looking at your Forex charts. The Forex markets are filled with economic news, economic reports, and many more potential influences on your decision making process. Try not to let this subjective information influence you too much. Instead, understand that the movement of price in these markets is nothing more than an ongoing demand and supply equation for currency. Low risk, high reward, and high probability trading opportunity is present when this simple and straight forward equation is out of balance. For more information on exactly what a demand and supply imbalance looks like on a price chart, please see my prior articles.

Hope this was helpful, have a great day.

Learn to Trade Now

Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer. Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management. Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Editors’ Picks

EUR/USD comfortable below 1.0800 lower lows at sight

EUR/USD comfortable below 1.0800 lower lows at sight

The EUR/USD pair lost ground on Thursday and settled near a fresh March low of 1.0774. Strong US data and hawkish Fed speakers comments lead the way ahead of the release of the US PCE Price Index on Friday.

EUR/USD News

GBP/USD trades sideways above 1.2600 amid quiet session

GBP/USD trades sideways above 1.2600 amid quiet session

The GBP/USD pair trades sideways around 1.2622 during the early Asian session on Friday. The market is likely to be mute in light trading on Good Friday. Later in the day, the US Core Personal Consumption Expenditures Price Index will be released.

GBP/USD News

USD/JPY holds positive ground around 151.50 following Japanese CPI data

USD/JPY holds positive ground around 151.50 following Japanese CPI data

The USD/JPY pair holds positive ground for the second consecutive day near 151.45 on Friday during the early Asian trading hours. The cautious approach from the Bank of Japan to keep monetary conditions accommodative exerts some selling pressure on the Japanese Yen.

USD/JPY News

Editors’ Picks

USD/JPY holds positive ground around 151.50 following Japanese CPI data

USD/JPY holds positive ground around 151.50 following Japanese CPI data

The USD/JPY pair holds positive ground for the second consecutive day near 151.45 on Friday during the early Asian trading hours. The cautious approach from the Bank of Japan to keep monetary conditions accommodative exerts some selling pressure on the Japanese Yen.

USD/JPY News

AUD/USD depreciates on risk aversion amid a stronger US Dollar

AUD/USD depreciates on risk aversion amid a stronger US Dollar

AUD/USD extends its losses for the second successive session on Friday. However, market activity is expected to be subdued due to light trading on Good Friday. Meanwhile, the US Dollar strengthens as recent data indicates annualized economic expansion in the United States, driven by consumer spending.

AUD/USD News

Gold price finishes Thursday’s session set to reach new all-time highs

Gold price finishes Thursday’s session set to reach new all-time highs

Gold price rallied during the North American session on Thursday and hit a new all-time high of $2,225 in the mid-North American session. Precious metal prices are trending higher even though US Treasury yields are advancing, underpinning the Greenback.

Gold News

Top 3 Price Prediction BTC, ETH, XRP: Retail watches from the sidelines with a bias for shorts

Top 3 Price Prediction BTC, ETH, XRP: Retail watches from the sidelines with a bias for shorts

Bitcoin is showing strength as markets head into the Easter holidays. As it rises, altcoins are following suit, with Ethereum and Ripple posting almost similar gains. Meanwhile, there remains an unfilled CME Gap, with a lot of liquidity also resting above and below BTC price.

Read more

Bears have been standing before a steamroller so far this year

Bears have been standing before a steamroller so far this year

Despite a pushback on rate cuts from Christopher Waller, and what was supposed to be cautious trading sentiment ahead of critical US inflation data released later on Friday, the S&P 500 rose on Thursday, marking its best first-quarter performance in five years.

Read more

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7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

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