The general concept of trading in the forex market
If you have just entered the forex market, forex trading may be a bit confusing for you; Since nothing is physically bought in the forex market and traders trade on the parity rate of currencies. To better understand Forex trading, let's look at each unit of a country's currency as a share of that particular country's economy.
The currency price of a country is actually a direct reflection of the opinion of economic activists and market traders about the current and future economic health of that country. So actually when you buy a unit of Swiss Franc in the forex market, you are basically buying a "share" of the Swiss economy. Somehow you predict that the Swiss economy is doing well and will even get better with time.
In general, the exchange rate of a currency against other currencies is a reflection of the economic conditions of that country compared to the economy of other countries.
Types of currency in the forex market
Currencies in the forex market are classified into three categories, main currencies, secondary currencies and emerging economic currencies. This classification is based on the volume of transactions of these currencies in the market.
Although the forex market has many currency pairs, it is better to start trading in the forex market with major currencies, especially if you are new to this vast market. The reason for this recommendation is the high volume, low transaction cost, as well as the stability and analysis of these currencies.
Most traders have a different view on the classification of major currencies, for example, some forex market traders know only USD, EUR, JPY, GBP and CHF as major currencies and also know currencies such as CAD, NZD and AUD as commodity currencies. .
Here we consider all the eight mentioned currencies as "major currencies".
Below, each is presented by symbol, currency name, and country in which they are used:
How to form and concept of currency symbol
The formation of the currency symbol that we use today in the form of three letters has taken place due to the "ISO 4217" rule that was approved by the International Organization for Standardization (ISO) in 1973. These three letters are known as the currency code, so currency symbols always have three letters; The first two letters are the name of the country and the third letter is the name of the country's currency.
For example, in the symbol NZD, NZ stands for New Zealand and D stands for dollar, or in the symbol JPY, the letters JP stand for Japan and the letter Y stands for yen.
Determining the parity rate of currencies
Determining the parity rate of currencies is done in two ways, "floating parity rate" and "fixed parity rate".
Floating rate parity
In the first method, floating parity rate, the parity rate of each currency compared to other currencies is based on the supply and demand of the market, that is, market buyers and sellers will determine the value of each currency against other currencies by registering their buy and sell orders in the market.
Fixed parity rate
In the second method, the fixed parity rate, according to their economic goals, governments tie the parity rate of their country's currency with a currency or a basket of currencies and they keep its parity rate constant or with a very low fluctuation rate of that currency or currency basket.
Long-term price changes of a currency can be caused by the foreign exchange interventions of the government and the central bank to equalize the value of goods in two countries, and on the other hand, short-term fluctuations in the parity rate of currencies can be due to news and events related to the economy of that country.
Contracts in the forex market
Contracts in the forex market
Contracts in the forex market are divided into two categories: cash contracts and CFD contracts, of course, each of these categories includes sub-contracts such as Spot, Future and Option.
Cash and spot forex contracts result in the physical exchange of currency at a specified exchange rate, while in CFD contracts, actual forex transfers do not take place and you simply trade on the difference in entry and exit rates of that currency.
To learn more about CFD contracts and how they work, be sure to read the article, What are CFDs in KopitoInvest's Articles section.
In this article, we reviewed the basic elements of the forex market and the types of contracts in this market. We also learned that nowadays forex brokers, regardless of currencies, offer a wide range of financial instruments including gold, silver, oil, gas, shares of the world's largest companies, stock market indices, as well as cryptocurrencies in the form of CFD contracts.