What is foreign exchange trading?

Views 22KAug 9, 2023
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Core points

● foreign exchange trading is the act of buying and selling foreign exchange. Foreign exchange market is the largest financial market in the world.

Currency pairs in ● foreign exchange transactions can be divided into straight, cross and rare trades. The trading volume of straight currency pairs accounts for 85% of the trading volume in the entire foreign exchange market.

● leveraged foreign exchange trading not only magnifies the earnings, but also increases the risk.

● global foreign exchange market can be traded 24 hours a day except Saturday, Sunday, Christmas and New Year's Day.

Detailed explanation of concept

Foreign exchange refers to the means of payment and credit instruments expressed in foreign currencies and used for international settlement. Foreign exchange trading, in short, is the act of buying and selling currencies. Exchange the currency of one country or region for the currency of another country or region, resulting in foreign exchange transactions.

The international foreign exchange trading market is the largest financial market in the world, spread all over the world, and can be divided into three parts: Asia-Pacific region, Europe and North America. The most important ones are London, Frankfurt, Zurich and Paris in Europe, New York and Los Angeles in North America, Sydney, Tokyo, Singapore and Hong Kong in the Asia-Pacific region.

Participants in the foreign exchange market mainly include central banks, commercial banks, non-bank financial institutions, brokers, dealers and large multinational enterprises, with an average daily turnover of more than US $6 trillion. For investors in Hong Kong, they can participate in foreign exchange transactions through institutions such as brokerages.

Currency pairs for foreign exchange transactions

The first step in foreign exchange trading is to choose the currency you want to trade, that is, currency pairs. Because foreign exchange currencies always appear in pairs, such as the pound against the dollar and the euro against the dollar. The currency pair in front of the currency is called the "base currency", and the later currency is called the "relative" or "quoted" currency.

Foreign exchange trading is to speculate whether the base currency will rise or fall in the future relative to the later quoted currency. For example, if you expect the euro to appreciate against the dollar, you will buy euros / dollars, indicating that you have bought euros (and sold dollars at the same time). If you think the euro will depreciate, you will sell the euro (and buy dollars).

Pairwise combinations of various currencies make up many currency pairs, which can be divided into three types.

The first type is the international common currency pair containing the dollar, known as the major currency, also known as "straight", including euro / dollar, pound / dollar, dollar / Canadian dollar, dollar / yen, and so on. The trading volume of direct currency pairs accounts for 85% of the total foreign exchange market trading volume.

The second type is the international common currency pair that does not contain the dollar, which is called "cross trading", such as sterling / yen, yen / Canadian dollar, and so on.

The third type is a currency pair consisting of a major currency and the currency of an emerging economy, called a "rare market", such as the dollar / South African rand.

There will be a difference between the buying price and the selling price in foreign exchange transactions, which is called spread. Take EURUSD as an example, if the selling price is 1.00596 and the buying price is 1.00604, the gap (1.00604-1.00596 = 0.00008) is a spread of 0.8 pips.

For investors, spread is the most basic cost of foreign exchange trading. Generally speaking, the straight trading is the most active and the spread is the lowest, while the rare market is lack of liquidity and the spread is the highest.

Leveraged foreign exchange trading

In the foreign exchange market, if you buy a foreign exchange contract with a higher value than the actual account balance, it is leveraged foreign exchange trading. Leveraged foreign exchange trading requires a cash guarantee, that is, a margin.

The higher the leverage ratio, the less margin capital is required. By increasing the trading leverage, if the market trend of the currency pair is consistent with the position direction, then they will be able to make a larger profit with less principal through a very small fluctuation. However, if the market moves in the opposite direction, leveraged trading can also significantly increase investment risk.

In the Hong Kong market, the SFC allows leverage at 20:1, or at least 5 per cent of the opening value of the initial margin.

Operating time of foreign exchange market

Because of the time difference, the major foreign exchange markets around the world have become a huge market that operates round the clock and 24 hours a day. The foreign exchange market is closed only on Saturdays, Sundays and the annual Christmas and New Year's Day days. The following are the trading hours of some of the world's major foreign exchange exchanges.

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Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.

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