1. What is foreign exchange?
Foreign exchange refers to various means of payment expressed in foreign currencies that can be used for international settlement.
This includes credit instruments and securities expressed in foreign currencies, such as bank deposits, commercial bills of exchange, bank drafts, foreign government bonds, Treasury bills and various securities.
1. Definition of Foreign exchange According to Chinese laws and regulations (1997), foreign exchange is expressed in foreign currencies and can be used as means of payment and assets for international liquidation, including: ¡ñ Foreign currency, including paper currency and coinage;
¡ñ Foreign payment certificates, including bills, bank deposit certificates, corporate bonds, stocks, etc.
¡ñ Foreign currency securities, including government bonds, corporate bonds, stocks, etc.
Special Drawing Rights, European monetary units;
¡ñ Other foreign exchange assets.
2. Understanding the Exchange rate Exchange rate, also known as exchange rate, refers to the exchange rate between the currency of one country and the currency of another country, usually expressed as the exchange ratio between the two currencies.
For example, EUR/USD = 1.1094 indicates that 1 euro is equal to 1.1094 US dollars.
In the foreign exchange market, the exchange rate is usually expressed with five digits, such as:
USD/JPY (USD/JPY) 107.23GBP/USD (GBP/USD) 1.23343. Change in exchange rate The minimum unit of change in the exchange rate is a “point”, and the change in the last digit of the exchange rate is called 1point.
If AUDUSD changes from 0.7727 to 0.7732, we say Aussie gains 5 points;
Usdjpy changed from 117.37 to 116.98. We say USDJPY fell 39 points, or the yen gained 39 points.
4. The marking method of exchange rate takes one currency as the benchmark to mark the price of another currency, which is called the marking method of exchange rate.
There are usually three methods: (1) Direct price method refers to a certain unit of foreign currency as the standard to calculate the amount of domestic currency payable.
This is equivalent to calculating how much local currency should be paid for a given unit of foreign currency.
Most countries in the world, including our country, have adopted the direct list price method.
In the foreign exchange market, the dollar-denominated method, which is used to show how much a dollar is exchanged for other currencies, is also called the direct quotation method.
For example, Japanese yen, Swiss franc, Canadian dollar, Singapore dollar, Hong Kong dollar, etc., are all directly priced.
One caveat when investing in such currencies: Contrary to common wisdom, a lower number indicates a more expensive currency.
¢Ú Indirect price method refers to a certain unit of domestic currency as the standard, to calculate the amount of foreign currency receivable method.
In the foreign exchange market, the indirect quotation method is used to show how much a non-dollar currency is exchanged for dollars.
For example, euro, British pound, Australian dollar and so on all adopt indirect pricing method.
(3) Cross-bid method refers to the price between other currencies other than the domestic currency.
In the foreign exchange market, the exchange rate between non-US dollar currencies is usually referred to as cross-bid, also known as cross exchange rate.
Such as euro versus yen, yen versus Hong Kong dollar, etc.
2. What is Foreign exchange trading?
In fact, it is very simple to trade “money” itself.
Because you are not buying something, this kind of transaction confuses people’s understanding of the transaction.
Foreign exchange is the practice of simultaneously buying one currency and selling another.
Think of buying a currency as buying shares in a particular country, a bit like buying shares in a company.
The price of a currency directly reflects the market’s assessment of a country’s current and future economic conditions.
Generally speaking, the exchange rate of one country’s currency and that of other countries reflects the economic situation of that country compared with that of other countries.
So when you buy yen, you are investing a share in the Japanese economy.
You are betting that the Japanese economy will do well and even get better over time.
Once you sell those “shares” to the market, you hope to make a profit.
Each currency in the world has a three-digit subtitled abbreviation that is accepted by the international financial market. For example, the abbreviation of RMB is CNY (China Yuan), where the first two letters of CN stand for the abbreviation of the country (China), and the third letter (Y) stands for the name of the currency unit of the country or region (Yuan).
When you trade in the foreign exchange market, you are buying and selling “currency exchange”, such as euro/dollar (EUR/USD) or pound/yen (GBP/JPY).
We can think of each currency pair as a tug of war between different currencies.
Exchange rates fluctuate depending on how strong or weak a currency is at a given moment.
We refer to a currency pair that contains the U.S. dollar as a “major” or “straight” pair.
These currency pairs all contain the U.S. dollar and are the most frequently traded.
These currency pairs are among the most liquid and most widely traded in the world.
We refer to currency pairs that do not contain dollars as “cross currency pairs”, or “crosses”.
The most actively traded cross-currency pairs consist of three major currencies besides the dollar: the euro, the yen and the pound.
The chart below shows the ten most actively traded currencies.
The US dollar was the most traded currency, accounting for 84.9 per cent of all transactions.
The euro ranks second at 39.1 percent, while the Japanese yen is third at 19.0 percent.
As you can see, the top currencies dominate the list.
So why, many wonder, does the dollar play such a central role in foreign exchange markets?
¡ï The United States is the world’s largest economy;
¡ï The dollar is the global reserve currency;
¡ï The United States has the largest and most liquid financial markets in the world;
¡ï The United States has an ultra-stable political system;
¡ï The United States is the world’s only military superpower;
The US dollar is the main currency medium for international cross-border transactions.
Oil, for example, is priced in dollars.
So if Mexico wants to buy oil from Saudi Arabia, it can only do so in dollars.
If Mexico had no dollars, it would have to sell pesos before buying them.
Fortunately, the foreign exchange market is a 24-hour market. The most obvious difference between the foreign exchange market and other trading markets is the continuity of time and the non-constraint of space.
The main volatility and trading hours are between the start of business in New Zealand on Monday and the end of business in Chicago on Friday.
There was a small amount of foreign exchange trading in the Middle East over the weekend, but it was largely ignored as normal interbank conversions, not the usual speculation.
So to sum up, the foreign exchange market is a continuous trading market.
Most foreign exchange traders buy or sell foreign exchange based on intraday price changes.
In the END, from an investor’s point of view, liquidity is very important.
In the 24-hour foreign exchange market, each trading period has its own rules and characteristics. Therefore, we only need to understand the rules and adopt corresponding strategies at appropriate time periods to greatly improve the success rate of trading and avoid trading risks.
