Foreign exchange transaction: what is foreign exchange? Interpretation of foreign exchange transactions

　　Foreign exchange transaction: what is foreign exchange?

　　Foreign exchange transactions are a term used to describe individuals who engage in active foreign currency transactions, usually for economic benefit or gain. This can take the form of speculators who want to buy or sell a currency in order to profit from changes in the price of the currency; Or it could be a hedger, protecting their accounts against their own currency positions.

　　The term "foreign exchange trader" may describe an individual trader on a retail platform, a bank trader using its institutional platform, or a hedger who may manage his own risks or outsource functions to a bank or fund manager to manage risks.

　　Foreign exchange transaction: foreign exchange market

　　The foreign exchange market, or FX for short, is a decentralized market that promotes the trading of different currencies. This is done over the counter (OTC), not on a centralized exchange.

　　Without your knowledge, you may have participated in the foreign exchange market by ordering imported products such as clothing or shoes, or more obviously, by purchasing foreign currency during your vacation. Traders may be attracted to foreign exchange for a variety of reasons, including:

• 　　Size of foreign exchange market

• 　　Multiple currencies available for trading

• 　　Different fluctuation levels

• 　　Low transaction cost

• 　　24 hours a week

　　This article introduces traders at all levels. Whether you are a novice in foreign exchange trading or want to use your existing knowledge, this article aims to provide a solid foundation for the foreign exchange market.

　　Foreign Exchange Trading: two sides of each market

　　A unique aspect of the foreign exchange market is the way prices are quoted. Since money is the foundation of the financial system, the only way to quote money is to use other currencies. This will produce a relative valuation indicator, which may sound confusing at first, but it may become more standardized as this bilateral agreement is used for a longer time.

　　A pair of foreign exchange transactions does provide traders with some additional flexibility, allowing traders or investors to express their transactions in the currency they think is the most appropriate.

　　Let's take the euro as an example. Suppose a trader has optimistic forecasts for the European economy, so he wants to be long. However, assume that the investor is also optimistic about the US economy, but bearish on the UK economy. Well, in this case, investors will not be forced to buy EUR / USD (this will be a long EUR / USD transaction); Instead, they can buy EUR / GBP (long EUR / GBP).

　　This provides investors or traders with additional flexibility to avoid "shorting" the dollar to buy the euro, allowing them to buy the euro while shorting the pound.

　　Foreign exchange transactions: base currency equivalent currency

　　An important difference in foreign exchange quotation is convention: the first currency listed in the quotation is called the "base" currency of the currency pair, which is the quoted asset. The second currency in a currency pair is called the "relative" currency, which is the Convention for quotation, or the currency used to define the value of the first currency in a currency pair.

　　Let's take euro / dollar as an example

　　The euro is the first currency in the quotation, so the euro will be the base currency in the euro / US dollar currency pair.

　　USD is the second currency in the quotation, which is the currency in which the euro / USD quotation is used to define the value of euro.

　　Therefore, it is assumed that the euro / dollar quotation is 1.3000. This means that one euro is worth $1.30. If the price rises to $1.35, the value of the euro will rise, and the value of the dollar will fall relatively.

　　If investors are bearish on the euro but bullish on the dollar, they can choose to "short" the currency pair and expect the price to fall; After that, they can "cover" the transaction by buying back at a lower price and collect the price difference.

　　Foreign exchange transaction: Interpretation of foreign exchange market

　　In short, the foreign exchange market works like many other markets because it is driven by supply and demand. For a very basic example, if European citizens who hold euros have a strong demand for dollars, they will convert euros into dollars. The value of the dollar will rise while the value of the euro will fall. Keep in mind that this transaction only affects euro / dollar currency pairs, for example, it will not cause the dollar to depreciate against the yen.

　　Foreign Exchange Trading: what drives the flow?

　　In fact, the above example is just one of many factors that can drive the foreign exchange market. Other factors include a wide range of macroeconomic events, such as the election of a new president, or country specific factors, such as current interest rates, GDP, unemployment, inflation and debt to GDP ratios, to name a few. Top traders use the economic calendar to learn about these and other important economic announcements that can drive the market.

　　In the long run, a major driver of foreign exchange prices is the interest rate of the relevant economy, as this may have a direct impact on long or short currency holdings.

　　What explains popularity?

　　The foreign exchange market allows large institutions, governments, retail traders and individuals to convert one currency into another. The "core" of the foreign exchange market is the so-called inter-bank market, where liquidity providers trade with each other.

　　The advantage of foreign exchange trading between global banks and liquidity providers is that foreign exchange can be traded around the clock (within a week). With the end of the Asian trading session, European and UK banks went online before being handed over to the US. When the US session enters the next Asian session, the whole trading day ends.

　　What makes this market more attractive to traders is the often available 24 / 7 liquidity. This means that traders can easily enter and exit positions, because there are many people willing to buy and sell foreign exchange.

　　Foreign Exchange Trading: how does it work?

　　This is very similar to other markets: if you think that the value of a currency will rise (appreciate), you can consider buying that currency. This is called "long". If you think the currency will fall (depreciate), please sell it. This is called "shorting".

　　Foreign exchange transactions: who are the main participants?

　　There are basically two types of traders in the foreign exchange market: hedgers and speculators. Hedgers always want to avoid extreme fluctuations in exchange rates. Think about large conglomerates like ExxonMobil and how they want to reduce their exposure to foreign exchange movements.

　　On the other hand, speculators are looking for risks and are always looking for exchange rate fluctuations to take advantage of. These include large trading desks for large banks and retail traders.

　　Read foreign exchange quotation

　　All traders need to know how to read foreign exchange quotations, as this will determine the price at which you enter and exit transactions. Looking at the currency quotation below, the first currency in the euro / US dollar pair is called the base currency, namely euro, while the second currency in the currency pair (US dollar) is called the variable or quotation currency.

　　Interpretation of foreign exchange transactions

　　For most foreign exchange markets, the maximum number of decimals is five, but the first four digits are the most important. The number to the left of the decimal point represents the relative currency of a unit. In this example, it is US dollars, so it is US $1. The following two digits are cents, so in this example it is 13 cents. The third and fourth digits represent a fraction of one cent, which is called a point.

　　The key is to note that the fourth digit after the decimal point is called "point". If the euro depreciates by 100 points against the US dollar, the new selling price will reflect the lower price of 1.12528, because the cost of buying 1 euro in US dollars is lower.

　　Another way of saying the above quoted purchase price is: in dollar terms, the value of one euro is one dollar, 13 cents, 52 points and 8/10 points.

　　What is "point"?

　　PIP stands for "percentage of points", which is the basic unit of measurement of currency pairs. The value of points will vary according to the relative currency in the currency pair. For the currency pair with us dollar as the relative currency or listed as the second in the quotation, the point value or cost of 10K hand currency is usually US $1, which also means that the point value or cost of 10K hand is 10 cents and that of 100k hand is US $10.00.

　　Therefore, if an investor buys 1000 euros / dollar, it will be worth 10 cents for every increase or loss. If the same investor buys 10000 euros / dollar, every increase or loss will be worth 1 dollar / dollar. If investors buy 100000 hands, the point value will be $10 / person.

　　Take this example: suppose that investors who buy euros / dollars see a 50 point return. Well, if the investor uses 1K hands, the 50 point return will be equivalent to $5 ($.10 x 50 = 5.00); Investors who use 10K hands will receive a return of $50 (US $1 x 50 = US $50). If the same investor uses 100000 hands, the return will be $500 (US $10.00 x 50 = US $500).

　　Point cost or value is an extremely important data point that foreign exchange traders need to pay attention to, because it is the way to convey point spread; Therefore, it is very important for traders to "know their points".

　　Simulated account foreign exchange trading: gain experience without taking hard capital risk

　　One of the biggest risks or disadvantages of learning the market or trading is that trading may be a costly job, and the risk of financial loss always exists when the actual hard capital is traded on the trading platform. Whenever a person buys or sells a foreign exchange pair, they will bear the risk of loss. For a new trader who has just learned their way, this may be an expensive tuition.

　　However, many foreign exchange brokers provide simulated accounts so that new traders or potential customers can be familiar with the market, platform and foreign exchange trading dynamics before depositing their own money.

　　Simulated accounts can provide a simulated environment in which new traders can use fictitious capital to implement their strategies and manage their transactions. This may be an ideal area to learn about the dynamics of foreign exchange trading - how to trigger a position, how to set a stop loss, and how to expand trading.

　　Foreign Exchange Trading: why trade foreign exchange?

　　Compared with other markets, foreign exchange trading has many advantages, as follows:

　　1、Low transaction cost: generally, foreign exchange brokers can make money on the spread by opening and closing transactions before applying any overnight financing fees. As a result, foreign exchange trading is cost-effective when weighed against markets such as equities, which attracts commissions.

　　2、Low spread: due to its liquidity, the trading spread of major foreign exchange currency pairs is very low. When trading, spread is the initial obstacle to overcome when the market moves in your favor. Any additional points in your favor are net profit.

　　3、More profit opportunities: foreign exchange trading allows traders to take speculative positions against currency rise (appreciation) and fall (depreciation). In addition, there are many different foreign exchange pairs for traders to find profitable transactions.

　　4、Leveraged Trading: foreign exchange trading involves the use of leverage. This means that the trader does not have to pay the full cost of the transaction, but only a small part of the cost. This may magnify your profits, but it may also magnify your losses. At dailyfx, we recommend adopting a strict risk management approach to limit your effective leverage to 10 to 1 or less.

　　New to foreign exchange trading? We have a comprehensive guide designed to give you the basics of trading.

　　Key foreign exchange terms

　　Base currency: This is the first currency in the quotation currency pair. In terms of euro / dollar, euro is the base currency.

　　Variable / quote currency: This is the second currency in the quote currency pair and the dollar in the euro / dollar example.

　　Bid: the bid price is the highest price that the buyer (bidder) is prepared to pay. When you want to sell foreign exchange pairs, you will see the price, usually on the left side of the quotation, which is usually red.

　　Q: This is the opposite of the offer and represents the lowest price that the seller is willing to accept. When you want to buy currency pairs, this is the price you will see, usually on the right and blue.

　　Communication: This is the difference between the buying price and the selling price, representing the actual spread of the basic foreign exchange market plus the additional spread increased by the broker.

　　Point / point: point or point refers to the movement of the fourth digit after the decimal point. This is usually the way traders react to the trend, that is, the pound / dollar is up 100 points today.

　　Leverage: leverage allows a trader to trade a position while investing only a small portion of the total value of the transaction. This allows traders to control larger positions with a small amount of money. Leverage amplifies gains and losses.

　　Margin: This is the amount required to open a leveraged position. It is the difference between the full value of your position and the funds lent to you by the broker.

　　Margin call: when the total capital deposited, plus or minus any profit or loss, falls below the specified level (margin requirement).

　　Liquidity: if a currency pair can be bought and sold easily, it is considered to be liquid because there are many participants trading the currency pair.

　　Learn free resources and guidelines for foreign exchange trading

• If you are just starting your trading trip, it is important to understand the basics of foreign exchange trading in our free new guide to foreign exchange trading.

• We also provide a series of trading guides to supplement your foreign exchange knowledge and strategy development.

• Our research team analyzed more than 30million real-time transactions to reveal the characteristics of successful traders. Combine these characteristics to gain an advantage in the market.

• Traders often pay attention to the emotions of retail customers when trading in the popular foreign exchange market. Dailyfx provides such data based on Ig customer sentiment

• The foreign exchange market has developed for centuries. For a summary of the most important developments shaping this $5trillion a day market, please read our foreign exchange history article.

　　Frequently asked questions about foreign exchange transactions

　　What is foreign exchange trading?

　　Foreign exchange transaction is the act of converting one currency into another. The way currency prices are quoted is conducive to trading potential, because each currency is quoted in other currencies. The euro can be quoted against the US dollar (eur/usd), the British pound (eur/gbp), the Japanese yen (eur/jpy) and many other currencies, providing a long list of Euro pairs for traders.

　　Why do people trade foreign exchange?

　　The most common answer here is that the purpose of many foreign exchange transactions is to buy currency "low" and then sell "high", and vice versa. The goal of short positions is to "sell high" and "cover lower".

　　However, this does not explain the goal of all foreign exchange traders, because many "hedgers" or institutions just want to mitigate the risk of currency fluctuations that are adverse to their positions or investments. An example of this may be an international company like Toyota that wants to eliminate or hedge some of its exposure to the yen. Otherwise, if Toyota fully invests in yen through its capital reserves and the value of yen weakens, Toyota's main business may be vulnerable to currency losses in the portfolio; This is a risk that can be resolved by diversifying or hedging its currency position.

　　How does one start foreign exchange trading?

　　A good first step is to familiarize yourself with the dynamics of the market through a simulated account, which allows new traders to manage their exposure with fictitious dollars in a simulated environment. The simulated account can give future foreign exchange traders the opportunity to trade in the simulated environment without the risk of economic loss. This can be an ideal training ground for new traders to learn the dynamics of foreign exchange trading, establish their strategies, and better understand how they want to enter the market by themselves.

　　What is the "best" way to conduct foreign exchange transactions?

　　There is no universally praised strategy, and traders can use this strategy to surpass other strategies. For most foreign exchange traders, the key is to find something useful to them, usually based on their own personality or world view. One of the most appropriate statements on this issue may be that there is more than one way of Foreign Exchange Trading: some short-term traders follow their positions on the five minute chart, and some long-term traders may not look at the price, but look at it once a day.