Forex (Foreign Exchange – foreign currency) is a foreign exchange market formed during the evolution of the global financial system in 1972, when it was decided to untie the exchange rate from its binding to gold. There are different opinions on this: whether it was right or not, but the fact of the globalization of world finance remains a fact: transnational corporations, investments in business and the economy of some countries from others, labor migration, joint space and military projects – all this has gone beyond the gold reserves of a country.
Thus, at present, the value of a particular currency is determined by the real state of the economy: GDP, unemployment, gold and foreign exchange reserves, the availability of government bonds, the housing market, the policy of the national bank of the country – all this is now evaluated by participants in the currency markets when making speculative transactions, based on the principles of fundamental analysis.
Let’s see – who are these players and participants, whose efforts form supply and demand, there are volumes of transactions that determine such phenomena as liquidity, volatility and spread.
Of course, first of all these are national banks (central banks, hereinafter – the Central Bank) of countries (Fed, IMF, Deutsche Bank, Bank of Russia, Bank of England, etc.), then these are commercial banks, multinational corporations (Boeing, Roscosmos, Nokia, Microsoft, etc.), large insurance companies (Alico, AIG, Munich Re, CSG, etc.) and brokers, hedge and investment funds.
Simply put, the organizations that have the most money are money that is a commodity in the foreign exchange market. Well, do not forget about private investors and traders who, thanks to the availability of this market through Internet services, make not a single, but a collective volume of transactions, following the trend or against it.
Looking at such a list of those gathered, it is easy to imagine the volume of cash flows passing through the “counters” of this market – about $ 8 trillion. ($8 000 000 000 000 000) daily!
Now is the time to figure out what, in fact, is a commodity when performing a currency transaction. The foreign exchange market, which means it is money.
In order not to use long names (Polish krona, New Zealand dollar, Russian ruble, Swiss franc, etc.), symbols were introduced for each currency: USD – American dollar, EUR – euro, RUR – Russian ruble, NOK – Norwegian krone, etc. Only 2 currencies participate in one operation to exchange money (currency) of one country for the currency of another.
This is how the concept of “currency pair” is formed. Moreover, it is important which currency will be in the first place (quoted), and which will be in the second (quoting). Let’s look at an example to immediately understand what a quote is.
EURUSD currency pair (Euro – US dollar)
EUR is in first place; USD is in second. In fact, it can be represented as a simple fraction (this is also important for forecasting by fundamental analysis methods):
As a result of this division, a quote is obtained that can answer the question “how many US dollars do I need to buy 1 euro”.
A quote is the price that will be displayed as a chart in the trading terminal.
It is worth noting that the quote is a digit with 5 decimal places.
How to make forecasts based on the history of quotations – studies technical analysis.
In the example given, the quote is direct, which means that the euro is bought for the US dollar. There is also the reverse, which is usually implied when performing the opposite operation – when USD is bought for EUR. In order not to get confused, the concept of “tool” and its name were adopted.
Thus, currency pairs have fixed ticker designations – EURUSD, USDCAD, USDJPY, GBPUSD, etc., and to separate forward and reverse quotes, the concept of the direction of the operation is used – BUY (BUY), when a direct quote is bought for the quoted currency, and the sale operation (SELL), when the reverse quote is taken into account – i.e. for the quoted currency the quoted one is being bought.
Do not be confused by the complexity of the above construction – the task of a currency trader is to predict the direction of change in a direct quote and decide to perform a BUY operation if the forecast says that the price will go up, and SELL – if the opposite is true.
It is the ability to correctly assess the situation that is the basis of a trader’s professionalism!
Wealthy Traders experts are ready to help you at any stage of your professional development!