At the end of the Second World War, there was a period of economic chaos. In this context, the great Western governments have highlighted the need to create a unique system of monetary cooperation that will stabilize the world economy.

Thus, in 1944, the Bretton Woods System was introduced. This system established the gold-dollar standard, allowing to quote currencies in correlation with the US Dollar. In 1971, however, due to the different rhythm of economic growth in the signatory states the system became obsolete and limited, being replaced by another, which allowed, in broad terms, to quote any currency to other and the free interchange.

During the 1990s, thanks to the speed of the Internet, banks began to create their own trading platforms to show customers real-time change of quotations.

Meanwhile, trading platforms have been created for individual investors, thus ensuring market accessibility, but initially only for the big players - banks and commercial companies.

Nowadays, due to the big number of concurrent brokers (the intermediaries between the market and investors), the Foreign Exchange Market (FOREX) and its opportunities have become accessible to anyone.

To download and install a trading platform you can click here.

 

The Foreign Exchange Market is the place where demand and supply for/of foreign currency/currency lending meet. This is a unique network where participants from all over the world are looking to exchange one currency for another through phone or on-line orders.
Therefore, the subject of all foreign exchange transactions are the currencies.

Given that FOREX operations do not involve physical, tangible elements, some confusion may arise.
Buying a currency is like buying a company's shares. The price of a currency reflects the market opinion (of its participants) on the present and future economic situation of the currency's issuing state.
Therefore, buying a currency can be regarded as the acquisition of an "equity" in the economy of the issuing state.
For example, let's suppose we bought US Dollar. In this case, we have gauged that the US economy is prosperous and it will improve further in the future, which will increase, proportionally, its currency's purchasing power. Thus, by buying the US dollar at a certain price and then selling it at a higher price, we will make a profit.

One of the particularities and advantages of FOREX over other financial markets is the possibility to make an impairment profit, because in FOREX when we close a trade, behind our close order there is an opposite trade to our initial trade.
We will explain this mechanism with an example.
We think that the Euro will depreciate against the US Dollar. We execute a Sell EUR/USD order. Basically, we sell Euro to get the US Dollar. Upon closing the trade, a Buy EUR/USD is automatically initiated. In other words, we bought EUR cheaper. The difference recorded in this way is our Profit. So, we get a larger number of monetary units.
Now let's see this example in numbers.

We have 100 EUR and currently the exchange rate is 1 EUR = 1.4 USD. We gauge that the value EUR is about to fall in the next period. We go to the bank and Sell our 100 EUR in exchange for 140 USD (100 * 1.4). In 2 weeks, EUR falls as expected, 1 EUR = 1.2 USD.
Now we go back to the bank and buy back our 100 EUR and in exchange we will pay 120 USD. The difference between the price we first sold at and the price we pay when we buy back the same but cheaper currency is our profit (140 USD - 120 USD = 20 USD Profit). In FOREX we can do this in front of our computer, without going to a bank or to a currency exchange house.

 

 

Currency Pairs

In FOREX currencies are traded in pairs. The purchasing power of a currency is always expressed in relation to another currency.

Each currency is identified by 3 letters, after a unique abbreviated system - ISO4217. The first two designate the issuing state and the third letter is the first letter of the currency's name.

For example:
USD - US is the abbreviation for United States and D for dollar.
CHF - CH is the abbreviation for the Confoederatio Helvetica (Switzerland, Liechtenstein and the Enclaves of Campione d'Italia and Büsingen) and F for Franc.
EUR is the exception, because it is not the currency of a single state but for all the states from Euro Zone.

In the table below you will find abbreviations of the major currencies traded in the market and their names in the trader's jargon.

 

Currency Symbol	Currency Name	Issuing Country	Common Referrence
USD	American Dollar	USA	Buck
EUR	Euro	Euro Zone	Fiber
JPY	Japanese Yen	Japan	Yen
GBP	Pound (Sterling)	United Kingdom	Cable
CHF	Swiss Franc	Switerland	Swissy
CAD	Canadian Dollar	Canada	Loonie
AUD	Australian Dollar	Australia	Aussie
NZD	New Zealand Dollar	New Zealand	Kiwi

 

Currencies are expressed in relation to others, appearing in pairs - the ratio between a currency's purchasing power related to another represents the price or exchange rate.
For example: EUR / USD, EUR / JPY, AUD / NZD, EUR / CHF, NKK / DKK.

 

In other words, exchange rate of currency A in relation to the currency B reflects the economic conditions of the issuing state of currency A compared to the economic conditions of issuing state of currency B. This ratio is also called the quotation.

In everyday life, we can easily see this at currency exchange offices. They display a purchase price and a selling price. The difference between these two prices is the exchange house's profit, the commission for the intermediation of the exchange transaction.

In FOREX, for the vast majority of participants, exchanges or transactions are made through brokers, who in return for their services perceive a fee called spread. However, this commission is much lower than that used by foreign exchange houses.

 

So, trading in FOREX involves buying or selling a currency for another, operations that have a double meaning:

• Placing a Buy order  >  a Sell order is automatically initiated when we close the trade.
• Placing a Sell order  >  a Buy order is automatically initiated when we close the trade.

The pairs containing US dollar are called Majors, because they are the most traded and the most liquid.

The Non-USD pairs are called Crosses. The most traded ones are those that comprise EUR, JPY and GBP, in this order.

Pairs that match a major currency and the currency of a developing country like Brazil, Mexico, Hungary, Romania, and so on, are called Exotic pairs.

 

Exotic Pairs	Issuing Countries	Currency names
USD/ZAR	USA/South Africa	American Dollar/Rand
USD/MXN	USA/Mexico	American Dollar/Peso
USD/THB	USA/Thailand	American Dollar/Baht
USD/SEK	USA/Sweden	American Dollar/Swedish Krona
USD/DKK	USA/Denmark	American Dollar/Danish Krona
USD/NOK	USA/Norway	American Dollar/Norwegian Krone

There are many more exotic pairs. Remember that these parities are not traded very often, which is why the fees charged by brokers may be higher.

Synthetic Pairs

Synthetic parities are usually used by participants who are trading with a large capital when they want to make a trade, but the market is not liquid enough.

Assume a company wants to buy GBP in exchange for JPY (Buy GBP / JPY), but there is not enough supply of GBP of not enough demand for JPY in the market. In this case will be placed two opposite orders with two different Major pairs, derived from the first pair, as follows:

• Buy GBP / USD, equivalent to Buy GBP and Sell USD (we have previously explained the double connotation of each trade) and 
• Buy USD / JPY, equivalent to Buy USD and Sell JPY.

 

In this case, the same volume of USD is sold and purchased by the same entity, with the trades cancelling each other, leaving only Buy GBP and Sell JPY, the originally wanted trade.