What is the Forex Market? | Currencies and Types of Forex Contracts6 Minutos De Lectura

What is the Forex Market?

Forex or FX is the acronym in English for "Foreign Exchange" in Spanish currency exchange market. Forex is a decentralized global over-the-counter market for all currencies that are traded around the world.

The currencies or currencies are the last commodities that exist in the market. Every time a company or governments buy or sell products and services in a foreign country, they are subject to currency trading that involves the exchange of one currency for another.

By definition, only currencies are traded in the Forex market. However, today almost all brokers in the world offer, through their trading platforms, the option to invest in various financial derivatives, such as currency pairs, commodities, stocks and stock indices. The commercialization of these derivatives is not spot (payment and delivery of the asset), but through contracts for difference (CFD, for its acronym in English), a modality in which there is no longer delivery of the asset, since it only negotiates the difference between the prices opening and closing.

When did the Forex Market start?

Specifically, there is no knowledge of the event that triggered this Forex phenomenon, but a series of events are known which resulted in the Forex market that we know today.

It all started with the "Breton Woods" treaty and was abandoned in the early 1970s. In this treaty, the participating countries had their currency fixed at values of either gold or the US dollar.

In 1973 the most powerful nations in the world introduced a free floating regime where free floating was allowed managed by market forces, or more precisely the forces of supply and demand. Since then the forex market has been available for speculation, hedging and other reasons.

The size of the forex market is now much larger than all American exchanges combined, with a daily trading volume greater than that of all exchanges in the world combined. The business of foreign currencies Forex is the central axis of the main financial centers around the world such as New York, London and Tokyo, creating a single and immense international market with transaction amounts that in total exceed 2.5 trillion dollars a day (2,500,000 million U $).

What is traded in the Forex market?

Money. Currencies are freely bought and sold on the market. This transaction involves the simultaneous buying and selling of two currencies (currency pair).

The Forex currency exchange is the purchase of one currency and the sale of another simultaneously, and in the Forex market you operate with currencies from all over the world.

For example:

You have information that suggests that the Euro is going to rise in value, in this case what we are going to do is buy the Euro pair: EUR / USD (Euro / US Dollar). When you buy EUR / USD, what you are actually doing is buying EUR and simultaneously selling USD.

Where do all the transactions occur?

Unlike other financial markets, there is no physical place where all operations are made in the Forex market. All transactions are made through electronic communication systems (telephone, online platforms, etc.) between banks, large companies, investors, operators, etc. This is called the “Over the Counter” (OTC) market.

What is a currency pair?

In the Forex market, world currencies are traded in pairs, for example USD / JPY. If you buy a currency pair, you are buying the base currency and selling the quote currency. The bid (the bid price) represents how much quoted currency it takes for you to get one unit of the base currency. Conversely, if you sell the currency pair, you are selling the base currency and buying the quote currency. The demand (the selling price) of the currency pair represents how much of the quoted currency you will get from selling one unit of the base currency.

Types of Forex Contracts

Contracts are tools used to buy or sell a currency. In Forex there are different types of contracts, below we present 3 types of contracts:

a) Spot contracts:

Spot Forex contracts are contracts in which the parties agree to buy and sell a currency at the current market price. This contract is executed "spot", that is to say immediately.

Spot trading accounts for almost a third of all transactions on the Forex market. A spot operation involves the purchase or sale of a foreign currency.

Spot trades are settled "immediately", as opposed to those settled on a certain date in the future (Note: by convention, in the Forex market the payment is actually made two days later). The spot market is related to transactions that operate with the current price of an instrument.

b) Forward contracts:

Forward contracts, also known as Forex Forward contracts, are currency purchase and sale contracts in which a certain price is stipulated at which one currency must be exchanged for another in the future. This type of contract is commonly used in trading strategies to place an order at a specific price that is not currently available.

In a forward operation (sometimes also called a "Forward Contract"), a buyer and a seller agree on an exchange rate for some future date and the transaction occurs on that date at the previously agreed rate, regardless of what the market rates are on. that moment. The future date can be within a few days or months.

For example:

If you trade $ 1,000 EUR / USD at 1.5666 for a date two months from today, regardless of whether the EUR / USD indices rise or fall, on that future date the transaction will be made at the agreed rate of 1, 5666.

c) Futures Contracts:

Forex futures contracts are contracts in which currency trading is agreed to at a specific price on a specific date. The substantial difference between forward contracts and futures contracts is that futures contracts are binding on the parties, who must fulfill the exchange contract on the expiration date.

What is a Forex broker?

A Forex broker is a broker or agent, that is, the individual or firm who acts as an intermediary between a buyer and a seller, usually charging a commission. Brokers are nothing more than intermediaries that give traders the opportunity to access the interbank market 24 hours a day to carry out transactions in the foreign exchange market.

How to choose a broker to invest in Forex?

When you start trading Forex you have to create a safe trading environment.

Financial trading is a regulated activity in almost all the countries of the world, especially in the most important financial centers such as the United Kingdom, the United States, the European Union, Japan, Australia and Canada, among others.

When trading Forex make sure your broker is licensed. Trading with a Broker without a license will only offer you the protection contained in the terms of the contract. This is not ideal.

There are 3 main points that you should consider when looking for safe conditions to trade or invest:

- Segregation of client funds: ensures that your money is not used by your broker for anything, except your Trading, which makes it always available for withdrawal if you request it;

- Financial services compensation scheme: defines the amount of funds that will be compensated in the extreme case that the broker or bank is bankrupt.

- Efficient processes for handling customer comments and complaints:

ensures that if your queries are not resolved in a few hours, they are immediately sent to the compliance or customer service department.




There are other important aspects when choosing your broker such as:

- instruments and styles of trading offered to the trader
- Customer Service
- training to the trader