Basic concepts and terms of the Forex market

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This article explains various basic concepts and terms used in Forex market.

 

Currency market

 

Currency market – a set of conversion and deposit-credit operations in foreign currencies, carried out between counterparties – participants in the foreign exchange market at a market rate or interest rate.

 

Currency transactions

 

Currency transactions are contracts of foreign exchange market agents for buying and selling, calculating and lending foreign currency on specific terms (amount, exchange rate, interest rate, period) with performance on a certain date. Current conversion operations (exchange of one currency for another), as well as current deposit-credit operations (for a period of up to one year) constitute the main share of currency transactions (definition by D. Yu Piskulov, Theory and Practice of Currency Dealing, Moscow INFRA-M 1995).

 

There is a difference between conversion and deposit-credit operations. Conversion operations do not have a length in time and are carried out at a certain point, and deposit-lending operations have a duration in time.

 

Deposit-lending operations are usually allocated in a separate market – the money market (Money Market).

 

The exchange rate

 

The exchange rate is the price of a monetary unit of one country, expressed in monetary units of another country in sales transactions.

 

The exchange rate can be formed in two ways: based on the supply / demand ratio for the currency in the free market or in an administrative way (usually by the central bank or the government).

 

Currency quotation

 

Currency quotation (from the French coter, literally – numbering, labeling) is the establishment (fixation) of the exchange rate of one currency to another in accordance with the current legislative norms and established practice.

 

Currency quotes are of three types:

 

    • direct quotation – the number of units of the national currency for one unit of foreign currency.

 

    • the reverse quotation is the amount of foreign currency per unit of national currency.

 

    • cross-rate (sometimes called “cross”) – the exchange rate between the two currencies, determined on the basis of the exchange rate of these currencies relative to the third currency. Basically, the US dollar is used as this third currency as the currency used in 80% of transactions.

 

 

The main currencies

 

    • USD = the US dollar, financial slang also uses the names greenback, buck, dolly

 

    • EUR = Euro, a single European currency

 

    • GBP = English pound , the finance slang also uses the names ” Great Britain Pounds, sterling, cable.

 

    • CHF = Swiss franc, financial slang also uses the name “swissy” (swissy),

 

    • JPY = Japanese yen

 

 

Other currencies

 

    • CAD = Canadian dollar

 

    • AUD = Australian dollar, financial slang also uses the name “aussie”

 

    • NZD = New Zealand dollar, financial slang also uses the name “kiwi” (kiwi).

 

 

A currency pair is a text entry of a currency quote .

 

The base currency (traded currency) in each currency pair is written on the left (first).
Currency quotes (quoted currency) each currency pair written to the right (second).
Value or rate of the currency pair is quoted currency amount per unit of the base currency, such as dollars per 1.2264 1 EURO

 

Figures coming after the “.” Or “,” percentage points called simply points (points) or pips (pips), thus a paragraph (pips) at a forex is called the minimum price change, which is different for different pairs.

 

For pairs where the quotation currency (the second currency) is Eur, Gbp, Usd, Chf, Aud, Cad, one item is equal to one decimal place after the decimal point (0.0001). For currency pairs where the quote currency (the second currency) is Jpy, one item is one hundredth after the decimal point (0.01).

 

For example, a change in the price of the euro for the dollar from 1.2263 to 1.2264 is called a change of 1 point.

 

The change in the price of the dollar for the yen from 108.22 to 108.23 is also called a change by 1 point.

 

One hundred points up the base number, which for the dealer and trader jargon called the “big figure» (big figure) or simply a “figure”. For example, a change in the price of eur / usd from 1.2263 to 1.2363 or usd / jpy from 108.22 to 109.22 is an increase on the figure.

 

The following currency pairs are traded most actively in the market: EUR / USD – Euro to US dollar USD / JPY – US dollar to Japanese yen GBP / USD – pound to USD USD / CHF – US dollar to Swiss franc GBP / JPY – pound sterling to Japanese yen GBP / CHF – pound sterling to Swiss franc EUR / GBP – Euro to pound sterling

 

 

 

    • EUR / JPY – Euro to the Japanese yen

 

    • EUR / CHF – Euro to the Swiss franc

 

    • AUS / USD – Australian dollar to the US dollar

 

    • USD / CAD – US dollar to the Canadian dollar

 

 

Speculative operations conducted by the trader are always carried out with the base currency (which on the left in the currency pair ). Thus, by buying USD / JPY, you buy the US Dollar for Yen, and by selling EUR / JPY, you sell euros for yen. The purchase and sale of currency in a currency pair occur at different quotations. The trader always buys on Ask, but sells by Bid . Accordingly, the bank and the dealing company on the contrary buys from the trader on Bid, and sells it to Ask. Bid is always lower than Ask. Therefore, usually the trader is given at once 2 quotes, for purchase and for sale (Ask and Bid) . For example, the EUR / USD quotation is presented in the following form: 1,2252 / 1,2256 1,2252 / 56 52/56 – it is assumed that 1,22 – the trader knows when he is requesting a quotation. Such a quote means that a trader can sell at 1.2252 (Bid) or buy at 1.2256 (Ask) Spread is the difference between Ask and Bid.

 

The size of the spread on Forex is usually a dynamic value and depends on a number of factors:– Market conditions. In an unstable, volatile market, the spread may be slightly higher.
– Liquidity of the market of a specific currency. The more liquid the currency market, the less spread. Therefore, for example, the spread on EUR / USD, other things being equal, exceeds the spread GBP / JPY – The volume of the transaction. The larger and smaller ones are quoted in the interbank Forex market with a higher spread than the standard ones.

 

In the dealing center the spread usually fixed and increases only in moments of strong movements.

 

The price of a price point depends on the volume of the transaction and is always taken into account in the quote currency (the second currency in the currency pair), and, if necessary, is converted into dollars, usually automatically.

 

Cost of an item = volume of an operation x a minimum price change

 

For example, if you make an operation with a volume of 100,000 eur / usd, then the cost of the item for you will be 100 000×0.0001 = 10 usd.

 

For example, if you perform an operation with a volume of 350,000 gbp / jpy, then the cost of the item for you will be 350,000×0.01 = 3,500 yen.

 

If the value of the item is obtained in a currency other than the US dollar (that is, the quote currency is the US dollar), and, for example, the Japanese yen as in a pair USD / JPY, it can be converted into dollars.

 

For example, if a trader makes a profit in JPY (yen) then he needs to sell the yen and buy dollars for them or in other words buy dollars for yen (buy USD / JPY) . If a trader receives a loss in JPY, he will need to buy JPY for USD, or in other words sell dollars for yen (sell USD / JPY) . These transactions will also be covered by the rule of selling by Bid and buying by Ask. An example of a speculative operation.

 

After careful analysis, the trader asks the dealer for his quote for EUR / JPY and the dealer gives him the price of 131.52 / 57. Suppose a trader decides to buy EUR / JPY and makes an operation at a price of 131.57 in the amount of 400,000 eur. Let’s say that he was right in his forecast and after a while the rate rises to the mark of 132.16, at which the trader decides to sell 400 000 eur (to completely close his position).

 

The financial result of such an operation will be as follows.

 

132.16 (closing or selling price) – 131.57 (the price of opening or initial purchase) = 0.59 or 59 points (we got the difference in points) .
Multiply by the volume of the transaction:
0.59 X 400 000 = 236 000 is the result in quoted currency, that is, in JPY (Japanese yen).
Now the trader needs to translate this result into US dollars. Assume the dollar to the yen at the close of the above operation was 107.19 / 24. To get dollars, they need to be bought by selling yen, or in other words buy USD / JPY. Naturally, the transaction is executed on the quotation Ask or 107,24.
We calculate in US dollars.
236 000 / 107.24 = 2200.67 US dollars.

 

An open position (in financial jargon sometimes say “pose”) is an operation that is not closed by a reverse transaction, in which profit or loss is not fixed.

 

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