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Basic knowleage of forex

Currency pair

It is often difficult for new traders to understand the concept of trading currency pairs. They may ask, “Why not just buy the euro?” “Why must I pair with the US dollar?” The currency on the right side of the currency pair is to determine the comparative value. Without it, we cannot be the base currency (the currency to the left of the currency pair). Assignment. If the currency is not paired, we will not be able to determine what value of a currency is relative to or lost. By pairing two currencies, we can determine the volatility of one currency relative to another.

ISO (International Organization for Standardization) sets standards for abbreviations for national and foreign currency pairs. Since foreign currency has been quoted in the value of one currency against another, the foreign exchange currency pair consists of acronyms in both currencies, separated by a slash "/".

Currency is always traded in pairs, such as EUR/USD, USD/JPY. Each position requires buying one currency and selling another. When someone says that he is "buying EUR/USD", he says he is buying the euro and selling the dollar.

There are many other foreign exchange currency pairs available for trading, such as the Danish Krone, the Mexican Peso and the Russian Ruble. However, these currency pairs generally trade less and they are not considered to be the main currency.

currency

Currency refers to the trading unit issued by the national government or the central bank, and the monetary value is used as the unit of measurement of the transaction.

Base currency

The base currency refers to the first currency in the currency pair and the currency that is fixed at the time the currency pair is determined. In terms of daily trading volume in the foreign exchange market, the US dollar (USD) and the euro (EUR) are the most important benchmark currencies. The British Pound (GBP), also known as Sterling, is the third-ranked benchmark currency. US dollar-based currency pairs include USD/JPY, USD/CHF and USD/CAD; EUR-denominated currency pairs include EUR/USD, EUR/JPY, EUR/GBP and EUR/CHF . The pound is the base currency for the GBP/USD and GBP/JPY currency pairs. The Australian dollar (AUD) is the base currency of the AUD/USD pair.

Major currency pair

Most currency transactions involve “major currency pairs”, including GBP (GBP), Euro (EUR), JPY (JPY), Swiss Franc (CHF) and US Dollar (USD). Many traders also classify the Canadian dollar (CAD) and the Australian dollar (AUD) into this category. The following 6 pairs are widely recognized as major currency pairs: EUR/USD GBP/USD USD/JPY USD/CHF USD/CAD AUD/USD

Currency pairs sometimes use aliases. Below is a list of foreign currency pairs and their most commonly used aliases: GBP – Pound, Cable or Sterling EUR – Euro CHF – Swissy or Franc USD – Greenback CAD – Loonie AUD – Aussie NZD – Kiwi JPY - Yen

Cross currency pair

A currency pair that does not include the US dollar is often referred to as a cross currency pair. Cross currency trading can open up new areas of the foreign exchange market for speculators. Some cross-currency changes are very slow and the trend is very good. Some cross-currency pairs change very quickly and are capricious; the average daily change is more than 100 points. Many cross currencies have high swap values. Swaps are credits or debits resulting from daily interest rates. When traders hold positions overnight, they credit or debit interest based on the current interest rate. Cross currency usually produces interest rates higher than the main currency.

Bid price and Ask price

Foreign exchange prices or quotes include “buy prices” and “sell prices” similar to other financial products. The purchase price refers to the price at which the market is prepared to sell a currency pair in a foreign exchange transaction, which is also the price at which the trader wants to sell the currency pair. The selling price (sometimes referred to as "Offer") refers to the price at which the market is prepared to buy a currency pair in a foreign exchange transaction, which is also the price at which the trader wants to sell the currency pair (empty). The buyer/sale price is combined with a quote pair based on exchange rate fluctuations. The quotation is listed before the bid price, and the selling price is listed later. For example, the USD/JPY quote price is 120.93/96.

The difference between the bid price and the bid price is the spread, which reflects the price difference between the market maker and the price at which he wants to sell a currency pair. The spread of a currency pair that trades less in the foreign exchange market tends to be higher than the spread of a major currency pair that trades frequently. Contrary to the securities market, market makers in the foreign exchange market usually do not charge commissions to customers, but earn profits by point value.

exchange rate

The exchange rate, also known as the exchange rate, refers to the price of a country's currency expressed in another country's currency, or the price between the two countries' currencies. In the foreign exchange market, the exchange rate is displayed in five digits, such as: Euro EUR 0.9705 JPY JPY 119.95 GBP 1.5237 Swiss franc CHF 1.5003

The minimum change unit of the exchange rate is one point, that is, one digit change of the last digit, such as: Euro EUR 0.0001 JPY JPY 0.01 GBP GBP 0.0001 Swiss Franc CHF 0.0001

According to international practice, three English letters are usually used to indicate the name of the currency. The English after the Chinese name is the English code of the currency.

Cross exchange rate

In the international market, almost all currencies have an exchange rate against the US dollar. The exchange rate between a non-US dollar currency and another non-US dollar currency often needs to be calculated through the two exchange rates against the US dollar. The calculated exchange rate is called the cross exchange rate. A distinguishing feature of the cross exchange rate is that an exchange rate involves the exchange rate between two non-US dollar currencies. How to calculate forex cross quotes? There are several methods for calculating the cross exchange rate:

a. For the direct quote currency, the bid price is USD/JPY: 120.00 120.10 (cross-division). The bid price is DEM/JPY = 66.33 66.43 USD/DEM: 1.8080 1.8090

b. Same as indirect quote currency Buying price Selling price EUR/USD: 1.1010--1.1020 (cross-divided) Asking price Selling price EUR/GBP = 0.6873 0.6883 GBP/USD: 1.6010--1.6020

c. Direct quote currency and indirect quote currency Buy price sell price USD/JPY: 120.10 120.20 (divided by the same direction) Buy price sell price EUR/JPY = 132.17 132.40 EUR/USD: 1.1005 1.1015

Fixed exchange rate and floating exchange rate

There are two types of exchange rates: floating exchange rates and fixed exchange rates. Floating exchange rate is the value of money determined by market forces. The fixed exchange rate needs to meet a fixed value, that is, one currency is fixed by one, and even a certain number of certain commodities.

A fixed exchange rate is an exchange rate in which the exchange rate between one country's currency and another's currency is basically fixed. The fixed exchange rate system was implemented in the gold standard system from the early 19th century to the 1930s and the US dollar-centered international monetary system after the Second World War to the early 1970s. The fixed exchange rate is not that the exchange rate is completely fixed, but rather fluctuates around the upper and lower limits of a relatively fixed parity. For example, after the Second World War, the fixed exchange rate system centered on the US dollar, the official parity of the currency of the member countries of the International Monetary Fund is parity. The currency exchange rate of each member country can only fluctuate by 1% above the parity, and the central bank intervenes.

The floating exchange rate refers to the ratio of the exchange rate between the currency of a country and the currency of another country. There is no fluctuation in the upper and lower limits, but the supply and demand relationship in the foreign exchange market is determined by itself. On August 15, 1971, the United States implemented a new economic policy, allowing the dollar exchange rate to float freely. By 1973, countries generally implemented a floating exchange rate system. It was also from that time that the foreign exchange market continued to develop with the constant fluctuation of various exchange rates.

Direct quotation method and indirect quotation method

Direct quotation

The direct quotation method, also known as the payable quotation method, calculates how many units of national currency are payable based on the foreign currency of a certain unit (1, 100, 1000, 10000). It is equivalent to calculating how much local currency is required to purchase a certain unit of foreign currency, so it is called the price-paying method. Most countries in the world, including China, currently use the direct price method. In the international foreign exchange market, the yen, the Swiss franc, the Canadian dollar, etc. are all direct price methods, such as the yen 119.05, that is, one dollar against 119.05 yen.

Indirect quotation

The indirect quotation method is also known as the levy method. It is based on the national currency of a certain unit (such as 1 unit) to calculate the foreign currency receivable for several units. In the international foreign exchange market, the euro, the pound, the Australian dollar, etc. are all indirect price methods.

For example, the euro 0.9705 is one euro to one dollar.

In the indirect price method, the amount of the national currency remains unchanged, and the amount of the foreign currency changes as the value of the national currency changes.

The quotation in the foreign exchange market is generally a two-way quotation, that is, the quoting party simultaneously reports its own buying price and selling price, and the customer decides the buying and selling direction. The smaller the spread between the bid price and the ask price, the lower the cost for the investor.

The quotation spread of inter-bank transactions is normally 2-3 points. The quotation spread of banks (or dealers) to customers varies greatly depending on the situation. At present, the quotation spread of foreign margin trading is basically 3-5 points, Hong Kong is at 6- At 8 o'clock, domestic banks' firm trading ranged from 10-40 points.

What is a point (pip)?

A "point" price change in a forex trade is called a "pip", which is equivalent to the last digit of a currency pair. For the currency pair of the Japanese currency (such as USD/JPY), one point is from the second digit after the decimal point, such as 120.94. All other currency pairs that do not contain Japanese currency, "point" refers to the fourth decimal place, such as 1.3279. For example, the EUR/USD currency pair means that it costs $1.3279 to exchange 1 euro.

Spread

The difference between the bid price and the bid price is the spread, the price at which the price of a currency pair is to be sold and the price at which it is willing to buy the pair. Usually used to measure market liquidity, the smaller the spread, usually indicates the greater the liquidity; the larger the spread, the weaker the liquidity. Thus, the spread of a currency pair that trades less in the foreign exchange market tends to be higher than the spread of a major currency pair that trades frequently. Contrary to the securities market, market makers in the foreign exchange market usually do not charge commissions to customers, but earn profits by point value.

Make more or empty

A long position is when a trader buys a currency pair at a specific price and wants to sell it at a higher price, which is what other trading markets call "low-priced buy, high-priced sell." In the foreign exchange market, when one currency price of one currency pair rises, the price of another currency decreases, and vice versa. If the trader believes that the price of a currency pair will fall and hopes to buy it at a lower price in the future, this behavior is short, which is the opposite of the situation.

Each foreign exchange transaction is made up of one currency and is short on another currency. The trader defines his/her position in the former currency of the trading currency pair. The former currency in the currency pair is called the base currency, and the latter currency is the relative currency. When the trader buys the base currency, he/she is the currency.

Margin and leverage trading

The reason why the foreign exchange market can attract small-scale individual traders is the high leverage of the industry. Leverage creates a profitable opportunity for traders with small profits. Leverage is two-way. It can create both high returns and high risks. Therefore, leveraging leveraged high returns and high risks.

Contract size and point value

Each standard transaction in the foreign exchange market is a $100,000 (base currency) contract. In other words, when trading in a trading account, the trader essentially placed a $100,000 trade in the market. In the absence of leverage, licensed investors cannot afford such a volume. A 100:1 leverage allows traders to place the same ($100,000) trade with a $1,000 deposit. $100,000 divided by 100 equals $1,000, so 100:1 leverage means that a $1,000 margin can control a $100,000 position. Many retail forex brokers also offer a mini account option. A mini account is essentially 10% of the standard account value, which means the mini contract is $10,000 (base currency). A mini-hand transaction is a $10,000 transaction. A 100:1 leveraged trade means that a $100 margin will control the $10,000 contract. When the EUR/USD sell price is 1.2500, it buys a dollar of 100,000 contracts and sells 125,000 contracts. In the standard contract with US dollars as the relative currency (1 lot transaction), the point value of 1 point is 10 US dollars (1 point value of 1 mini hand is 1 US dollar). The exact point values ​​of other currency pairs vary, ranging from $8 to $10.

Leverage

The numbers listed above may discourage small and medium investors. Although it does reflect historical transactions, the adjustment of the modern foreign exchange system allows for small-scale investors to participate in foreign exchange transactions through high leverage. Stockbrokers may offer a leverage ratio of 2:1, which means you need to buy $1,000 in stock for $500; but forex can offer leveraged trading up to 100:1. Trading at a leverage ratio of 100:1, if you want to buy a standard lot of EUR/USD, you need to deposit $1,000 into your account. Forex traders can use leverage to expand their returns as prices change; but as mentioned above, this will also increase the risk of losses.

High leverage trading is the essential difference between foreign exchange and other markets

Why does Forex allow for high leverage? In the foreign exchange market, the currency currently traded is very small, and the price of money changes very little during a certain period of time. A price change of 1% (ie about 100 points) has been seen as a big change. Therefore, foreign exchange dealers can assume any position with a small amount of positions.

Margin

Margin is the amount of money that a customer must deposit as a guarantee to cover potential losses arising from adverse price movements.

Recovery of deposit

If the market moves in a direction that is not favorable to the trader, resulting in a loss in the account and resulting in insufficient margin, the customer will be automatically recovered. Forex traders will automatically close their positions to limit losses and avoid accounts becoming bad debts.

Overnight interest

Refers to the extension of the transaction to the next delivery date, the cost of which is calculated by the spread of the two currencies. Specifically refers to the spread between the next business day and the business day after it. Risk Managemen

Risk Management

Forex trading requires taking risks into account. Traders can decide to adopt a conservative or risky strategy to trade. Conservative trading means that a small number of orders are used for long-term trading, the number of trading lots is small, and risk management is strictly controlled to obtain a conservative profit target. Traders can reduce trading risk by setting stop/limit orders. When you place a single order, many experienced traders know when to go out. The 24-hour trading of the foreign exchange market makes it difficult for traders to make instant trading judgments because the market may experience violent shocks when he/she is not in the market. When the price reaches the set level, the stop and limit orders will be automatically suspended, closing the existing position (or opening a new position).

Limit order

The limit order is used to help the trader automatically close the position when the market price reaches the preset price to lock the profit. For long positions, the limit order is set above the current price; for short positions, the limit order is placed below the current price.

Stop loss order

Stop Loss orders are used to help traders minimize losses. For long positions, the stop loss order is set below the current price; for short positions, the stop loss order is set above the current price. As its name suggests, the purpose of a “stop loss order” is to close a position when the market moves in an unfavorable direction to reduce trading losses.

Risk warning:All foreign exchange, precious metals are accompanied with great risk, therefore is not suitable for all investors. Please be sure to fully understand the risks at your own can bear within the scope of the investment. More risk for details, please refer to the risk of WSG statement and deposit policy.