Forex: The Definitive Guide

What are currencies The term currency refers to the currencies that are used in a country or region other than your place of origin or monetary union. When we talk about currencies we talk about foreign currencies, that is, those official currencies that are different from the currency of a country or region in question. The official currency of a country or region, the local currency, is the reference currency in that country or region. While currencies are considered to be all those currencies that are different from those of the country of origin. These are foreign currencies that come from other countries or regions.

What are currencies used for?

Currencies are traded in what are known as foreign exchange markets, where transactions are made to buy and sell currencies. The price of currencies fluctuates or changes in value with respect to other currencies depending on the interest held in that currency at any given time. Interest or disinterest in a specific currency causes it to appreciate or depreciate in the foreign exchange market. That is, the volume of buying and selling a currency in the foreign exchange market determines its value with respect to another currency. We currently live in a world that is more globalized than ever in which a large number of countries with different monetary systems coexist. International transactions are the order of the day, so it is common for companies to operate with various currencies in order to establish business relationships with companies from other countries or monetary unions. For example, a Spanish company that trades with the United States or has investments in the United Kingdom needs to acquire both US dollars and British pounds to be able to carry out transactions with those countries. The price at which the Spanish company acquires these currencies will be determined by the interest that this currency arouses at that moment in the foreign exchange market.

forex market

The foreign exchange market, also known as Forex or FX (Foreign Exchange), is a global and decentralized market in which currency is operated, that is, currency purchase and sale transactions are carried out. The foreign exchange market facilitates the monetary flow derived from international trade.

Types of Forex Markets

It can be said that there are two types of currency markets based on the availability of the currency that is the object of the transaction. When the availability of the currency for the transaction is immediate, it is said to be cash or spot. On the contrary, when the availability of the currency that is the object of the transaction is not immediate, it is said to be in a term or forward. For availability to be considered immediate, it must be given within a maximum period of two days. If the availability exceeds two days, it will be considered in term.

Forex Market Features

• Market liquidity: It is said that the foreign exchange market is the most liquid in the world because operations are carried out constantly. When the main markets are open is when there is greater liquidity because a large number of agents participate in them that operate on the most traded currencies. 
• Open 24 hours a day: The Forex market is open 24 hours a day, with the exception of weekends, so it allows trading at any time of the day. 
• Accessibility: The foreign exchange market is a global and decentralized market. It is not a physical market but a digital one. In it you can carry out transactions through the Internet, making this market easier and more accessible. 
• Transparency: It is unlikely that there will be manipulations by any agent due to the negotiations of large volumes of capital, so it is a tremendously transparent market. 
• Leverage possibility: The Forex market allows you to obtain money loans that can favor greater profits or losses, depending on the operation. 
• Currency ratio: Each currency is tied to its country of origin and, therefore, to its policies. It is important to take this factor into account when choosing a pair to trade. 
• Low cost: The operations that occur in the foreign exchange market do not involve large commissions or expenses since the transaction costs in the Forex market are much lower than those that occur in the negotiations of other assets such as shares, for example.

Exchange rates The value that one currency has with respect to another is what is known as the exchange rate or exchange rate. The exchange rate allows us to know how many coins of one currency are necessary to obtain one unit of another currency. For example, how many dollars are needed to get one euro. There are different exchange rates between currencies that can vary according to different economic variables such as inflation, economic growth, etc.

currency codes

Currency codes are a shorthand way of referring to each currency. Each of the currencies that exist is assigned an alphabetic code made up of three letters and a numerical code made up of three figures. These currency codes, formally known as the international standard ISO 4217, were created by the ISO (International Organization for Standardization) to eliminate confusion caused by some currency names being used in many countries but having very different exchange rates. In the case of the alphabetic code, the first two letters of the code are equivalent to the country code of the currency according to the ISO 3166 standard. The third letter that makes up the alphabetic code is usually the initial of the currency itself. For example, in the USD code, the alphabetical code for the United States Dollar, the letters "U" and "S" refer to United States and the "D" to Dollar. Just as there are three-digit numerical codes assigned to each country according to the ISO 3166 standard, there are also three-digit codes for each currency. This numeric code is useful as long as there are countries where Latin characters are not used. According to the international standard ISO 4217, each currency has a three-letter alphabetic code and a 3-digit numerical code to refer to it. For example USD (840) for the US dollar, EUR (978) for the euro, GBP (826) for the British pound, JPY (392) for the Japanese yen, etc.

currency operations

Forex trades are transactions of buying and selling currencies. It is important to bear in mind that in currency operations, prices are denominated in pairs because they are transactions in which some currencies are bought and others are sold. USD/EUR or GBP/USD would be examples of currency pairs.

The first currency listed in the pair is the primary currency, also known as the base currency. For its part, the second currency indicated in the pair is called the quote currency or counter currency. In the case of the USD/EUR pair, USD would be the primary or base currency, while EUR would be the quote or counter currency.

The main currency pairs that are traded in the forex market are: 

•  – EUR/USD: euro and US dollar 
• – USD/JPY: US dollar and Japanese yen 
• – GBP/USD: British pound and US dollar 
• – USD/CAD: US dollar and Canadian dollar 
• – AUD/USD: Australian dollar and US dollar 
• – USD/CHF: US dollar and Swiss franc 
• – EUR/JPY: euro and Japanese yen

Another of the most important factors when talking about currency operations is that they are measured in base points, also known as pip (Percentage Point or Interest Point for a Price). Currency pairs are typically quoted to four decimal places, with the fourth decimal being the equivalent of one basis point. For example, if there is a movement from EUR/USD 1.1185 to EUR/USD 1.1184, it would be a fall of 1 basis point or 1 technical pip. This would mean that the USD would have moved 1 basis point against the Euro. Thanks to the base points, percentage changes can be indicated more easily.

Two prices are always included in the currency quote: the sale price, also known as the bid; and the purchase price, which is also called offer. The difference between these two prices is known as the spread. Bid is the price at which a unit of the base or main currency is sold. While Offer refers to the price paid for the purchase of a unit of the main currency. Spread is therefore the difference between these two prices.

currency types

• Convertible Currency: Convertible currencies are those that can be freely exchanged for other currencies. That is, they are not subject to any type of exchange control restriction. 
• Non-convertible currency: Non-convertible currencies are currencies that are not normally accepted in the international market. 
• Bilateral currency: Bilateral currencies are usually used to settle operations by countries that have signed bilateral agreements.
•  Exotic currency: Exotic currencies are currencies that do not have a wide international market.
•  Strong currency: Strong currency is the one that maintains a certain exchange rate stability. Strong currencies tend to correspond to countries with low inflation. It is said that a strong currency usually responds to a strong economy.

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