While money changers have existed since the invention of money, the modern era of Forex trading is a relatively new thing in history. You see, after World War II, the United States and its allies wanted to start a global effort to rebuild the war-ravaged economies of the world and to do so, they needed a global agreement to cooperate with each other to facilitate international business. Hence, to create a unified financial order in the postwar world, all the major economic powers attended a meeting formally known as the United Nations Monetary and Financial Conference, or the Bretton Woods Conference, in 1944. At that conference, it was agreed that each nation would pursue a monetary policy that would tie their national currencies to the price of gold.

Since the price of every national currency on earth was tied to that of gold, there were virtually no price discrepancies between any currencies. The only way the price of a currency could go up or down was when the price of gold fluctuated. The Bretton Woods system kept the currencies from having wild fluctuations and made it easier for countries to trade in the aftermath of a devastating World War.

However, in 1971, the United States officially ended the Bretton Woods system when they stopped using the gold standard, effectively making their currency a free float. Soon, all the major countries with large economies also disavowed the historic Bretton Woods system and as a result, almost all national fiat currencies of the world today are considered to be free float currencies.

What this means is that instead of being tied to the price of gold, the exchange rate between two fiat currencies is determined by the supply and demand of the respective currencies. Hence, the US dollar could lose its value against the British pound, while at the same time, its exchange rate could go up against the Japanese yen.

As a result, since the early 1970’s, currency rates often experience significant daily fluctuations. The free float nature of fiat currencies enabled investors to anticipate which currency’s rate is likely to go up or down against other major currencies and make a profit from the difference in prices.

In the modern world, when someone speculates on the future price movements of a currency and exchanges one currency fx trading contest for another with the sole purpose of profiting from price movements, they are engaging in Forex trading.