October 26, 2021

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Forex Basics: Learning About The 5 Types Of Currencies

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types of currencies

Currencies are the major elements that traders should be fully aware of when getting into the forex market. As a trader,  experts recommend that currencies and its various types and classifications should be mastered by heart so as to understand why certain pairs are more expensive than others.  In this article,  our goal is to orient you on the various types of currencies and their characteristics.  

The 4  types of Currency

As mentioned earlier,  currencies vary according to their nature and characteristics in the market.  Here is a list of these types. 

1. Currency Majors

This particular type of currency is determined upon checking currency pairs in the market. They are usually characterized by having the United States dollar as their base or counter currency.  Some countries that have currency majors are Japan, New Zealand, Australia, Canada.  Among traders,  this type is identified as high liquidity currencies.  

2. Currency minors

As seen in its name,  currency minors may seem like the opposite of currency majors but if we try to see it on a technical aspect,  a currency minor is identified when the currency of a particular country is matched to another currency aside from dollars.  

3. Exotic Currency

Exotic currencies are perhaps the opposite of the majors and the minors. We can certainly say this because exotic currencies are legal tender coming from developing countries that are paired with dollars. They are believed to have low liquidity. 

4. Cryptocurrencies

In the forex industry,  digital currencies could also be considered as a trading asset.  With this new innovation in the market,  cryptocurrencies are starting to be famous. In fact,  the El Salvador government has already regarded it as one of the legit currency or legal tender in their country. 

Significance Of Currencies in the Market

As stated,  currencies serve as the soul of the currency market because they serve as an asset. If you are willing to take FX trading as a long term endeavor,  having an idea on its nature and memorizing the various currencies that belong to each type will certainly help you understand how market rates behave. But apart from learning about currencies,  it is also important to learn about the other types of financial instruments.  forwards, CFDs and futures could also be utilized in the forex world.  Unlike cash currencies,  futures, forwards and CFDs are types of agreements of contracts that indicate when and where they should be delivered to the client at a previously agreed rate. These contracts can serve as an alternative or element for hedging.  In case you are not so familiar with hedging,  we will also try to provide you with its characteristics. As a financial instrument,  they too have their value but most of the time,  Though their values are also based on any of the particular types of currencies,  we can say that they are different because most cash currencies are settled within a day or fews days after.  Financial contracts such as CFDs and the like on the other hand are designed for payment at a certain time in the future and their rates do not rely on the FX market.  

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