Money depreciation and possible return to the gold standard abolished in the 1970s are getting truly hot topics. Experts speak for a well-balanced gold-based monetary system, having apparently forgotten its drawbacks. One of its glaring cons is no foreign exchange market as such. By the way, it was the gold standard collapse that spurred Forex.
Forex is a short-term trading market, where a trader aims to derive the profit from the price rate fluctuations. The maximum duration of a trade on Forex is several months, while on the stock market it may last for maximum 5-7 years.
The foreign exchange market is decentralized. Various banks trade on it using different software. Most individuals simply cannot enter the interbank Forex market, as the standard trade volume here varies from $100,000 to $1 million. A dealing centre acts as an intermediary between the bank and the trader.
All foreign currencies are quoted in U.S. dollars. Each quote has four digits after the dot. For instance, the EUR/USD quote looks as follows: 1.2836. A standard change in the quote is 1 tick in the fourth digit.
The 1.2836 quote means that one has to pay $128,360 to buy 100,000 euros. If there is a one-tick change in the price, the customer has to pay $128,370, i.e. ten dollars more.
Thanks to modern technologies, there are even more accurate quotes containing five digits after the dot, which decreases the risk of making errors when entering the market. InstaForex customers enjoy the opportunity to work with both four-digit quotes and five-digit ones.
The rates of foreign currencies are quoted in the U.S. dollars. However, some trading terminals include both direct and indirect rates and even cross rates. Direct quotes are foreign exchange rates quoted as the domestic currency per one U.S. dollar. They have a foreign currency trading symbol as the numerator and the U.S. dollar symbol as the denominator.
The value of the EUR/USD pair is quoted as 1 euro in terms of U.S. dollars. It shows how many U.S. dollars one needs to pay to buy one euro. This is a direct quote. Other examples of direct quotes are GBP/USD (British pound to U.S. dollar), AUD/USD (Australian dollar to U.S. dollar), and NZD/USD (New Zealand dollar to U.S. dollar). When buying such a pair, the trader buys a foreign currency and sells U.S. dollars. When he sells it, he sells a foreign currency and buys U.S. dollars.
An indirect quote is a U.S. dollar rate in terms of foreign currency. Its numerator is the U.S. dollar symbol, and its denominator is the symbol of a foreign currency. For instance, USD/CAD is a quote of the U.S. dollar in Canadian dollars showing how many Canadian dollars are to be paid for one U.S. dollar. USD/JPY (U.S. dollar to Japanese yen), USD/SEK (U.S. dollar to Swedish krona), and USD/CHF (U.S. dollar to Swiss franc) are also indirect currency pairs. Buying such a currency pair, the trader buys U.S. dollars and sells a foreign currency. And, vice versa, when selling it, he sells U.S. dollars and buys a foreign currency.
A cross rate is a quote of a foreign currency in terms of another foreign currency. As all foreign currencies are quoted in U.S. dollars, cross rates show quotes of foreign currencies through the prism of the U.S. dollar rate. The most popular cross rates are denominated in the Japanese yen and Swiss franc: EUR/JPY (the euro quote denominated in the Japanese yen), GBP/JPY (the British pound quote denominated in the Japanese yen), CHF/JPY (the Swiss franc quote denominated in the Japanese yen), GBP/CHF (the British pound quote denominated in the Swiss franc), and EUR/CHF (the euro quote denominated in the Swiss franc).
In 2011, the Swiss National Bank capped the franc at 1.20 CHF per euro. As a result, the franc market shrank, which was reflected in cross rates of foreign currencies denominated in the Swiss national currency.
A cross rate is calculated on the basis of the following formula:
FOR/FOR = FOR/USD * USD/FOR, where FOR is a foreign currency.
The main currencies included in the international reserves of different countries are the U.S. dollar, euro, British pound, and Japanese yen. These four currencies are called the majors.
The Canadian (CAD) and the Australian dollar (AUD) are powerful currencies, but their circulation is limited. They were called commodity currencies for dependence on movements of the raw material prices. The New Zealand dollar also belongs to this group.
The Russian ruble (RUB), Swedish krona (SEK), Norwegian krone (NOK), Danish krone (DKK), Singapore dollar (SGD), Turkish lira (TRY), Indian rupee (INR), South African rand (ZAR), South Korean won (KRW), and Polish zloty (PLN) are considered to be stable currencies, however they only circulate at the regional level.
The Chinese yuan (CNY) with its rate being set by the People’s Bank of China is not a freely convertible currency.
The U.S. Dollar Index reflects the greenback rate against the basket of foreign currencies. There are several types of USD indices that are calculated by various formulas. The classic U.S. Dollar Index shows the percentage price of the greenback against the six main currencies such as the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. The U.S. dollar price as of 1973 is taken for 100%. To learn more about the currency pairs offered by InstaForex, please go to the Contract Specifications section of the company’s website.
Beginners should pay attention to the majors and commodity currencies. You can gradually start working with crosses and less popular currencies as you get more and more experienced, because cross rate formation is quite complicated and spreads for unpopular currencies are high. Keep in mind that currency trading is the most active during the European and U.S. sessions, i.e. from 12:00 to 00:00 (UTC+4).