Foreign exchange is a large financial sector in the financial industry. If novices want to get started quickly, avoid being harvested by the market, and continue to develop, they must first understand some basic knowledge points about foreign exchange, and then slowly learn to invest.
The following are some essential knowledge points in foreign exchange trading, share them with friends who want to invest in foreign exchange
What is Foreign Exchange?
Foreign exchange refers to the currency between countries and is also a means of payment in international trade.
Forex trading refers to the act of buying and selling currencies of different countries. Foreign exchange trading can be conducted through banks, foreign exchange brokers or financial trading platforms. The purpose of foreign exchange trading is to make profits by predicting fluctuations in currency exchange rates.
Investors can make a profit by buying one currency while selling another in the hope that one of the currencies will rise in price. Forex trading often involves leveraged trading, which involves borrowing funds to trade, allowing investors to control larger transaction amounts.
Buy And Sell Currency Pairs
Forex trading is the exchange of one currency for another currency, so Forex trading always occurs in the form of currency pairs. The most commonly traded currencies in the market are called ” major currencies “. Most currencies are bought and sold against the U.S. dollar (USD), which is also the currency with the highest trading frequency.
The eight major currencies in foreign exchange trading are the US dollar (USD), the euro (EUR), the British pound (GBP), the Japanese yen (JPY), the Canadian dollar (CAD), the Australian dollar (AUD), the Swiss franc (CHF) and the New Zealand dollar (NZD) ). Transactions in these eight major currencies account for 90% of the trading volume in the global foreign exchange market .
The seven major currency pairs refer to the following seven currency pairs:
- EUR/USD: Euro to US Dollar
- GBP/USD: British pound to U.S. dollar
- USD/JPY: US dollar versus Japanese yen
- USD/CAD: US Dollar to Canadian Dollar
- AUD/USD: Australian dollar to US dollar
- USD/CHF: US dollar to Swiss franc
- NZD/USD: New Zealand Dollar to US Dollar
The currency on the left is the base currency (the value of the base currency is 1), and the currency on the right is the quote currency. When we go long on a currency pair, we actually go long on the base currency and short on the quote currency. When the exchange rate of a certain currency pair rises, it means that the base currency strengthens relative to the quote currency ; when the exchange rate of a certain currency pair decreases, it means that the base currency weakens relative to the quote currency .
The Structure of The Foreign Exchange Market
The foreign exchange market is one of the largest financial markets in the world. The market participants are as follows:
- International Bank: Also known as the Interbank market, it is the core of the foreign exchange market. Here, currency transactions take place between large banks, financial institutions, and large corporations. These trades are typically conducted with huge trading volumes and high leverage.
- Retail market: The foreign exchange retail trading market refers to the foreign exchange trading platform provided by retail foreign exchange traders (Retail Forex Broker). These platforms often provide individual investors with the opportunity to conduct small transactions and support a variety of trading instruments and leverage.
- Foreign exchange exchanges: Some countries have foreign exchange exchanges, which are places where foreign exchange transactions are organized within a specific geographical area or country. These exchanges provide an open and transparent trading environment, providing more information and protection to both parties to the transaction.
- Electronic trading: With the advancement of technology, most foreign exchange transactions are now conducted through electronic platforms that provide functions such as real-time quotes, chart analysis, and trade execution. Market participants can access these platforms via the Internet to conduct transactions.
- Financial institutions: In addition to banks, there are other financial institutions participating in the foreign exchange market, such as investment companies, funds and insurance companies, etc. They participate in the foreign exchange market through portfolio management and hedging strategies.
Advantages of the Forex Market
The foreign exchange trading market is large
The foreign exchange market is the world’s largest financial derivatives market, with a larger trading volume than the stock and futures markets. According to statistics, the daily transaction volume of the foreign exchange trading market is US$5 trillion. We know that when the Chinese stock market is actively trading, the daily trading volume is 1 trillion yuan, while the daily trading volume of the New York Stock Exchange in the United States is 70 to 80 billion US dollars.
Participants in the transaction include large and small banks, central banks, financial institutions, import and export traders, corporate investment departments, fund companies and even individuals in various countries, so it will be relatively fair and there is no need to worry about foreign exchange prices being manipulated by institutions.
Transactions are more flexible and have many opportunities
Forex has many advantages in terms of trading mechanics compared to stocks. The goal of foreign exchange investment is the national economy, not the performance of listed companies. Stock investment can only make money if it goes up, but in foreign exchange trading, you can buy up or down, and you can make money as long as you buy in the right direction.
24-hour trading, buying and selling can be carried out at any time
The time is flexible, starting at 8 a.m. every Monday (Beijing time) and ending at 4 a.m. on Saturday. You can easily open a position at any time in your spare time after get off work, without having to worry about being trapped due to the price limit. .
Use small things to make big things happen.
Foreign exchange margin trading uses the principle of financial leverage to operate funds in the foreign exchange market by expanding the credit limit. The leverage of foreign exchange is 50, 100, 200, 400, and 1,000 times. Generally, formal platforms provide 400 times leverage. That is to say, if your margin is 1,000 US dollars and you use 400 times leverage, you can do 40 times. million dollar deal.
According to statistics, one-third of billionaires in the United States are successful in foreign exchange investments. For example: Soros, Buffett and other people at the top of the world’s wealth rankings are the most classic legends of successful foreign exchange speculation.
Low investment and low threshold
If you want to start foreign exchange trading, you can usually open an account with a minimum of US$100, and the threshold is low.
The foreign exchange market is highly liquid.
Compared with other financial markets, the number of participants in the foreign exchange market is very large, which also makes the liquidity very high, and no matter how large an order is, it can be quickly digested by the market. Therefore, investors can respond to any news in the foreign exchange market, remit funds to or from the market at any time due to personal capital mobilization, and can conduct transactions at any time, with great liquidity and flexibility.
Fewer currency combinations and high precision
In the foreign exchange trading market, the combination of currency pairs is very limited, so investors only need to focus on these currency combinations. Like stocks, stock picking is a difficult task, because there are thousands of stocks in the stock market, the cost of analysis is high, and it is difficult to grasp the laws of the stock market.
Some Common Industry Terms in Foreign Exchange
Hand
The lot size of foreign exchange margin refers to the quantity of the transaction. For example, the quantity unit of a car is a car, the quantity unit of clothes is a piece, and the unit of foreign exchange margin trading is a lot.
It should be noted that the lot size referred to in foreign exchange is different from the stock lot size. In foreign exchange trading, 1 lot is the abbreviation of “1 standard lot”, which is a standardized contract with a contract value of US$100,000.
Later, the foreign exchange market also began to open up transactions to small capital. In addition to standard lots, there are also mini lots and micro lots. As shown below:
In actual transactions, one finger is usually referred to as a standard lot, so a mini lot is generally directly called 0.1 lot, and 1 micro lot is directly called 0.01 lot. Usually the minimum trading volume of foreign exchange brokers is also 0.01 lot.
Because foreign exchange margin has leverage, usually 20, 50, 100, 200 times, etc., if you make 0.1 contracts and use 100 times leverage, the required margin is: 100000*0.1/100=100 US dollars of margin.
Position
Position, also known as position, represents the foreign exchange trading balance. What we mean by trading lots, positions, and positions all mean the same thing. We usually refer to the act of initiating a buy or sell position as “opening a position” and holding these positions as “holding a position.”
Long position: If an investor believes that the price of an asset will rise in the future and is optimistic about this asset, that is, “long”, he or she can establish a long position (commonly known as “going long” or “opening a long order”) if the price rises in the future. gain benefits in the process.
Short position: When investors believe that the price of an asset will fall in the future, that is, “bearish”, they can make money when the price falls in the future by establishing a short position (commonly known as “short selling” or “opening a short order”).
Point
A “point” is a unit of calculation that represents the change in value (exchange rate) between two currencies. For example, if EUR/USD rises from 1.1052 to 1.1053, then the value of the increase of .0001 is 1 point. When the exchange rate fluctuates, the “point” is usually the last decimal digit of the exchange rate.
Spread
It is the smallest floating unit in foreign exchange transactions. When the exchange rate changes, the difference in point fluctuations is the “spread”. An example of forex spreads for EUR/USD. EURUSD quotes 1.07961/1.07972. The buying price is 1.07972, then subtract the selling price of 1.07961. In this way, we get a reading result of 0.00011, and the final calculated price difference is 11 points.
Position
Position is the proportion of the market value of the foreign exchange types you hold to your total funds. If you have 10,000 yuan and buy 5,000 yuan of foreign exchange currency pairs or gold, then your position is 50%. If you buy them all, then Your position is full. If you sell all the foreign exchange types you hold, then you are short.
Close position
Closing a position refers to the investor closing or unwinding a certain position held by the investor, clearing the position from the position and ending it. Position closing is achieved by selling a bought position or buying a sold position. The completion of the position closing action indicates the end of a complete transaction. Only by executing the position closing operation can floating profits be converted into actual profits or Only when the market conditions are unfavorable to your trading can you curb the increase in risks in a timely manner.
How Much Money Do You Need to Invest in Foreign Exchange?
Generally, no funds are required to open a foreign exchange account. Investors only need to fill in the account opening application form and submit a scanned copy of their personal ID. The amount of money the investment mentioned here is usually the amount of deposit. The thresholds for each platform are different. Most platforms range from 200 to 1,000 US dollars. You can do foreign exchange with a minimum of 100 yuan. Some platforms can trade with a minimum of 1 US dollar!
Finally, the number of foreign exchange entry lots is not the number of lots investors say they want to trade, but depends on the risks they can bear in their positions. The margin required to open a position should not exceed 20% of your total funds, otherwise There is a risk of liquidation.
For example, the margin we need to trade 1 lot is 1,000 US dollars. If our current total capital is 10,000 US dollars, then it is best not to open more than 2 lots, so that the risk can be greatly reduced.