What is foreign exchange margin trading?
Speaking of foreign exchange margin trading, first of all, what is foreign exchange trading?
Foreign exchange trading is the process of exchanging one country's currency with another country's currency. Reflected in specific operations: the process of standardization or semi-standardization of coins between individuals and banks, banks and banks, individuals and transaction brokers, banks and brokers, and brokers and brokers.
Foreign exchange trading is the world's most significant and most frequent form of capital flow, with a daily turnover of approximately US$1.9 trillion. Because the U.S. dollar is the de facto international reserve currency, the U.S. dollar has generally been used as the direct transaction object of other currencies since World War II. With the rise of the euro in the foreign exchange market, the volume of transactions using the euro as a direct transaction object began to rise. Unlike other financial markets, the foreign exchange market has no specific location and no centralized exchange. All transactions are conducted through traditional counters, telephones, or the Internet between banks, trading brokers, and individuals. Because there is no specific exchange, the transaction participants are all over the world, so the foreign exchange market can operate 24 hours a day. The quotations generated by bargaining during the transaction process will be transmitted through major information companies. The transmission media include software systems, website platforms, and various trading platforms so that investors can obtain real-time foreign exchange transactions.
So what kind of foreign exchange trading is margin trading?
Foreign exchange margin trading is also called margin trading. It refers to a spot or forwards foreign exchange trading method between financial institutions and between financial institutions and individual investors. In essence, it is a bit similar to domestic futures trading that has been developed for many years. When trading on margin, traders only pay 0.5% to 20% of the deposit (margin), and then they can deal with 100% of the quota, which is "big with small." While the possibility of profit has increased, risks have also been amplified in the same way. It is an investment method that requires wits and courage.
Foreign exchange margin trading originated in London in the 1980s and was later introduced to Hong Kong. In our country, individuals and institutions participated in such transactions in the early 1990s, leaving behind various stories of profit and loss.
As we mentioned earlier, foreign exchange margin trading is very similar to futures trading. At the same time, in addition to the implementation of the margin system like futures trading, foreign exchange margin trading has many characteristics that are different from futures trading:
The market for foreign exchange margin trading is invisible and unfixed. All transactions are carried out between investors and financial institutions, and financial institutions. There is no particular institution like a stock exchange. Second, foreign exchange margin trading does not involve the concept of delivery date and delivery month like futures. It has no expiration date. Traders can hold positions indefinitely according to their wishes, but they need to clear overnight interest rates; 3. The scale of foreign exchange margin trading is vast, and there are many participants; 4. The foreign exchange margin trading currency is very rich; any internationally convertible Currency can be used as a trading product; 5. The trading time of foreign exchange margin trading is 24 hours; one of the more special points is: foreign exchange margin trading must calculate the interest rate difference between various currencies, and financial institutions must pay to or from customers Deducted from the deposit.
Walk into the transaction site.
After knowing the source and essential characteristics of foreign exchange margin trading, we need to know some basic concepts common in this market first to understand it more deeply. This chapter will explain in detail for you.
Currency codes: U.S. dollar USD, Euro EUR, Japanese yen JPY, British pound GBP, Swiss franc CHF, Australian dollar AUD, New Zealand dollar NZD, Canadian dollar CAD.
The exchange rate is usually expressed in the left column in the following table; the quotation of EUR/USD is displayed as EUR/USD, the source of USD/JPY is displayed as USD/JPY, and so on.
As we can see, the currencies mentioned above are currently the most freely convertible in the market. More than 95% of inter-currency transactions in the foreign exchange investment market are generated between these currencies. Therefore, the public financial institutions also regard the quotations of these currencies as the main or all of the sources. Of course, if particular money gradually has more obvious circulation and exchange characteristics in the world in the future, it will be included in this quotation system; on the other hand, if one of the currencies becomes more and more important, If the currency is weak, or if the money is canceled, it will be screened out.
Exchange rate display: In the international foreign exchange market, the exchange rate (that is, foreign exchange quotation) is displayed with five digits, such as EUR/USD 1.0597, USD/JPY 114.32, GBP/JPY 189.93.
Exchange rate changes: The minimum exchange rate change refers to the difference in the last digit of the exchange rate (that is, one basis point change). For example, the exchange rate of EUR/USD is generally: X.XXXX; then the minimum change is 0.0001; USD/JPY The exchange rate is generally: XXX.XX, so the minor change is 0.01.
Quotation: The buying and selling prices of foreign exchange margin are determined and reported by banks, market makers, and brokers. Financial institutions will quote different buying and selling prices for each currency in real-time for individuals. It is up to individual customers to decide the direction of buying and selling based on their judgment. Of course, transactions between financial institutions will also quote corresponding prices in real-time, but there are some slight differences from the quotations seen by individual customers. For example, if the current EUR/USD quote is displayed as 1.0595/00, it means that the broker is now willing to buy your euros at 1.0597 and sell euros to you at 1.0600. We can see that the difference (spread) between buying and selling is 1.0600-1.0595=0.0005, which is five basis points. For investors: the smaller the spread, the smaller the transaction cost, and the more excellent the opportunity for profit. We all know that there is no concept of spread in the securities market, but there is a saying about handling fees. There is not much difference between the two, and it is a matter of transaction costs. That is to say, the spread or handling fee you have paid as soon as you trade, you need to make up for the spread or handling fee in the subsequent trend and then make a profit.
Classification of quotations: All margin quotations are divided into indirect quotes and direct sources. This classification is a continuation of historical formation, and they have different performances in calculating each point of profit, to be discussed later. Indirect quotation currencies include EUR/USD, GBP/USD, AUD/USD, NZD/USD, etc., that is, the quotation generated by converting the price of a non-U.S. currency to the U.S. dollar for price comparison; the direct quotation currency includes: USD/JPY, USD/CHF, USD/CAD, etc., that is, the quotation generated by converting the price of the U.S. dollar currency to the price ratio of the non-U.S. dollar currency. For example, the EUR/USD quotation is 1.0596, which means that every euro is exchanged for 1.0596 U.S. dollars; the USD/JPY quotation is 116.95, which means that every U.S. dollar is exchanged for 116.95 yen.
Trading contract: The contract unit of foreign exchange margin is similar to futures and securities trading. They are all carried out with a prescribed minimum fixed number as the unit, called one lot (port) contract. It would help if you were clear: the trading contract mentioned here refers to the capital unit after the investor invests in the margin to increase the ratio rather than the actual size of the client's funds.
Transaction description: In the foreign exchange market, currency trading is always a "relative" transaction, such as the euro against the dollar or the dollar against the yen. Correspondingly, all transactions are after buying one currency and selling another one at the same time. The base currency is the basis for "buy" or "sell." Currency pairs can be seen as tools used to buy or sell. For example, the euro against the US dollar (EUR/USD), if you think that the US economy will continue to decline and that will be detrimental to the US dollar, you can "buy" the EUR; that is, you buy the euro and expect the euro to rise relative to the US dollar. Relatively speaking, if you can "sell" the EUR, you "buy" the US dollar and sell the euro at the same time if you expect the US dollar to rise relative to the euro.
Profit and loss: The calculation of profit and loss calculates the value of each point when buying/selling a currency combination. If an investor buys euros at 1.0635 and then sells at 1.0650, the apparent profit is 15 points. How much value each point corresponds to depends on the different quotation methods! Indirectly quoted currencies, no matter how the exchange rate changes, the value of each issue is fixed, but for directly mentioned currencies, each point's actual discount will be affected by changes in the exchange rate.
Automatic rollover: In foreign exchange market transactions, all positions must be closed within two trading days. For example, suppose the investor sells one hundred thousand euros on Tuesday. In that case, the investor must take out one hundred thousand euros in cash on Thursday to close the position unless the euro's role is extended. Most dealers and banks automatically provide extension services for investors. At six o'clock in the morning Beijing time, investors’ foreign exchange positions will be exchanged to transfer the original foreign exchange positions to the next trading day before expiration. Any foreign exchange position postponed to produce a hedge or cover spread, and this spread is determined by the bank's overnight lending interest rate. The prices of the exchanged classes are usually different. The difference in quantity will change according to the currency pair, the interest rate difference between the two currencies, and the daily price changes. For example, on a particular day, the extension of each lot of the US dollar against the yen may be US$0.50, and the extension of each lot of the British pound against the yen may be 2.0 US dollars.
At 5 am Beijing time (6 o'clock in wintertime), dealers and banks will automatically calculate interest on open positions and add them to the capital of the account (if the interest is positive) or from the capital of the account Deduction within (if the claim is adverse). If the account's margin requirement is more than 2%, investors can earn interest rate spreads because they hold currencies with higher interest rates. Still, if they own coins with lower interest rates, the system will deduct the interest spreads. If the account margin is less than 2%, the interest spread will be removed regardless of which currency is held. The 2% margin is a convention in the foreign exchange market. However, most foreign exchange brokers require a margin ratio of at least three to five percent so that investors can extend their positions and get the spread of interest rates.
Special note: Every Thursday, the interest spread will usually be three times larger than usual because the extension of foreign exchange positions on this day needs to add the time of the weekend.
High leverage and low margin: The margin for foreign exchange transactions is cash that banks or dealers require customers to pledge to avoid customer transaction risks. Customers can hold positions that are much larger than the value of the margin by depositing the margin. On the current foreign exchange trading platform on the market, you can use leverage as high as 200 times to buy and sell and use automated procedures to ensure that customers will not lose more than the funds placed in the account. All account margin percentage levels are recorded in the system. The trading platform can calculate the funds required for holding positions (used margin) and the funds available for establishing new posts (usable margin) according to the situation of each account in real-time. Together with the balance, net worth, and real-time calculated profit and loss information, they are displayed in the account window. When the account exceeds the maximum allowable leverage ratio, the broker and bank trading department have the right to liquidate some or all of the positions in the report. Clients must monitor the margin situation in the account to ensure that they can stop loss independently, significantly when the market fluctuates wildly.
Margin is a double-edged sword.
Foreign exchange margin is an investment that is easy to get started, and the main factors for profit can be described as experience, information, and luck. Because of the two-way trading, amplification, interest return, and other characteristics of foreign exchange margin trading, many investors have participated in such transactions through various channels. Throughout history, we have found that just like any investment method, each method has its unique advantages.
(1) The capital is low, generally less than 10% of the actual investment;
(2) Two-way trading investment, both ups, and downs, have profit opportunities;
(3) The possibility of profit is high, sometimes more than double the profit a day;
(4) Risk controllability, price limit, and stop-loss point can be preset (this point should be viewed dialectically, mainly depends on the investor's experience and trading ability);
(5) 24-hour trading, participate at any time;
(6) Low handling fee and low transaction cost;
(7) The global daily transaction volume exceeds 1.9 trillion US dollars, which is not easy to fall into human manipulation;
(8) Information transparency is high, and all market quotations, data, and news are open.
The disadvantages of foreign exchange margin trading are essentially how to deal with the enormous risks in the event of immense market volatility, because a seemingly minor mistake in ordinary times, even if the entire capital investment is only 1% of the loss of the principal 2. Due to the amplification effect, it may not be enough to lose all the principal in the margin.
This significant loss is mainly because investors have problems in the following aspects:
(1) The magnification ratio is too high, and the risk is strengthened;
(2) Overly subjective, guess the head and guess the bottom;
(3) Gambling psychology;
(4) There is no capital control, full deposit;
(5) Lack of essential analysis ability, blindly follow suit.
Everyone will find that these problems are widespread because 80% of people know and make honest mistakes! Later, we will continue to explain how to avoid the above risks and make good use of foreign exchange margin as an investment tool.
Just as every other line is like a mountain, there are many terms and unique titles in the margin trading market; as the saying goes, "you don't understand, but you don't know." This chapter will give you a detailed explanation of the precise meaning of the main terms and provide you with a bit of help when reading market reviews and professional books.
Trading position, POSITION: A market agreement promises to buy and sell the initial part of a foreign exchange contract. Those who purchase foreign exchange contracts are long positions; those who sell foreign exchange contracts are short.
Short, short, SHORT: The transaction is expected to fall in the foreign exchange market in the future, that is, sell a certain amount of currency or options contracts at the current market price, and wait for the price to fall before making up for it.
Long, buy, LONG: Traders expect the future foreign exchange market price to rise, buy a certain amount of currency at the current price, and after a period of exchange rate increases, hedge the contract positions held at a higher price to earn profits. This method belongs to buying first and selling later; short positions are just the opposite.
Liquidation: Closing a previously bought (sold) currency position by selling (buying) the same currency.
MARGIN: To guarantee the performance of the contract and the guarantee in the event of transaction losses, equivalent to 0.5% (200 times) to 5% (20 times) of the transaction amount, which will be refunded after the customer performs the contract, and any loss will be deducted from the deposit accordingly.
Range: The range of currency fluctuations over some time.
Up and down: price target. (The level above the price is the resistance level, and the level below the price is the support level).
Bottom: a critical support level for the downside.
Long-term: one month to more than half a year (above 200 points). Mid-term: one week to one month (100 o'clock to 200 o'clock).
Short-term: one day to one week (30 to 50 o'clock).
Bear market: Long-term one-way market downwards.
Bull market: Long-term one-way market is up.
Interval oscillation: The currency fluctuates back and forth, up and down within an interval.
Cowhide market: market volatility is narrow.
Light trading volume: small trading volume and small volatility.
Active trading: The trading volume is large, and the volatility is significant.
Rise and fall: The currency's value has obvious directional development due to news or other factors.
Stalemate: Unknown market momentum, narrow range.
Consolidation: After a rise (fall) period, it will consolidate and fluctuate within the range.
Retracement and rebound: The reverse market appears in the middle in the general trend of price fluctuations.
Bottom-making and bottom-building: When the price drops to a particular place, there is slight fluctuation for some time, and the range is reduced (such as box sorting).
Breakthrough the support or resistance level (generally need to break above 20-30 points).
False breakout: Suddenly break through the support or resistance level but immediately turn back.
For closing: closing.
Upward exploration, downward exploration: test the price.
Profit closing: closing a position to make a profit.
Panic selling: sell and close a position when you hear some news, whether the price is good or bad.
Stop loss, stop loss: The direction is wrong, and the position is immediately closed at a specific price.
Short covering: Originally, it was an extended market, and it moved (sell) to sell (sell into the market or sell to close a position) due to news or data.
Long covering: The market is short and later changed to an extended market (entering or closing the position).
One-day turn: It was initially going to sell the market, but it went to the market again in the afternoon, exceeding the opening price.
Selling pressure: selling orders at rallies.
Buying gas: Pay at the reserve price.
Stop-loss buying order: After the short position is sold out in the foreign exchange market, the exchange rate does not fall but rises, forcing the temporary position to force a buyback.
Lock order: It is one of the methods of margin operation, which is to buy (buy), sell (sell) the same lot size, but not close the position.
Floating order: It means that the position will not be closed on the day (market) after the order is placed.
Online foreign exchange transactions
The development of the Internet in China has gone through many years. With the popularization of network information applications, online consumption and online payments have become more and more commonplace, and online transactions have emerged as the times require. This has a history of nearly four years in China's securities industry. Facts have proved that its convenience and safety have won the recognition of investors. Similarly, the online margin trading method in the foreign exchange market has penetrated Child, becoming a promising and readily available investment method. In the international market, foreign exchange margin online trading has become very common and has become the primary method of foreign exchange transactions. Transactions between institutions started to adopt this method, and individual investors are increasingly participating in the foreign exchange market through the Internet. At present, the dealers appearing in China provide services through Internet foreign exchange transactions.
The development of online trading has presented to every investor in real-time foreign exchange transactions that are difficult for individuals and small investment institutions to intervene. As we have seen, many brokers provide foreign exchange trading services through the Internet. From the perspective of investors themselves, there are various criteria for judgment.
Generally, the primary conditions that a good trading platform should meet are:
The program runs stably and has strong adaptability;
The quotation is fast, rarely wrong prices, stable and effective when the market fluctuates;
The transaction is short, and the history can be found;
Convenient operation, no time-consuming learning.
More requirements are reflected in the service level:
Real-time monitoring of margin;
Order real-time operation.
Introduction to NFA
In December 2000, the United States passed the "Futures Modernization Act," which requires all foreign exchange dealers to register as a futures commission merchant (FCM) with the National Futures Association (NFA) and the US Commodity Futures Trading Commission (CFTC) and accept For the daily supervision of the institutions mentioned above, foreign exchange companies who do not meet the qualifications or have not been approved within the time limit will be ordered to cease operations. The promulgation of this bill has put online foreign exchange margin trading on the track of standardized development.
NFA is an industry self-regulatory organization. The investment industry in the United States is relatively mature and regulated. Therefore, when choosing a margin broker, the first thing that many investors need to look at is: whether the institution is registered and managed by the NFA. At the same time, it will also inquire whether the institution is in the process of operating. There has been public information such as bad records. This measure provides a certain degree of convenience for individual investors to understand the reputation of dealers and plays a vital role in artificially reducing risks.
NFA introduction: http://www.nfa.futures.org/basicnet/Welcome.html
The National Futures Association (NFA) is a self-regulatory organization for the futures industry established in 1976 by Section 17 of the US Commodity Exchange Act. It is a non-profit membership organization. On September 22, 1981, the CFTC accepted the NFA and officially became a "registered futures association." On October 1, 1982, the NFA officially began operations.
Several regulatory responsibilities performed by NFA are 1. Audit and supervise members must meet NFA's financial requirements; 2. Formulate and enforce rules and standards to protect the interests of customers; 3. Arbitrate disputes related to futures; 4. Approval NFA membership, futures agents (FCMs), introducing brokers (IBs), commodity trading advisors (CTAs), and commodity joint venture fund managers (CPOs) can all become members of the NFA.
Industry ethics standards: The industry ethics standards implemented by the NFA include the content specified in Section 17 of the Commodity Exchange Act, such as prohibiting fraud, manipulation, and deceptive behavior, as well as unfair and improper transactions. The NFA also bans black market transactions and requires members to establish a monitoring system for employees and free accounts. These are similar to the requirements of the CFTC and exchanges. In addition, the NFA requires CPO and CTA members to comply with the special regulations of the CFTC and exchanges. NFA has also formulated a "know your customer" rule, requiring members to have a comprehensive understanding of new customers' situations and provide a futures trading risk disclosure statement before the customer opens a futures account.
How to determine the leverage ratio?
This is a critical question frequently asked by customers and investors, and it is also a university question in managing professional funds. It is a key to the success or failure of the investment.
One of the methods we use is to use the annual income/profitability of firm profitability and extend the reasoning to calculate an example.
For example, there is a profit record table used by the trading system for real trading. At 6:00 AM on November 3, 2003, 1,000 (K) was invested (1,000K means 1,000 1,000 = 1,000,000, which is a professional term in the trading room). The EUR/USD=1.1600 system signal initiated the purchase of EUR1 million, during which 36 transactions were made. By November 25, 2003, the euro reached 1.1800. The system has earned USD29,790. This means that one month's solid investment of 1 million euros can earn US$29,790. The monthly rate of return is USD29.790/1,000,000×1.1600=2.2568%, and the estimated annual rate of return is 2.568%×12=30.8%, and the profit rate is 30%.
Suppose investors decide to participate in margin trading and use financial leverage to expand the rate of return. In that case, they must also consider that the possible risk of loss will also increase the year-on-year rate. At this time, my advice to investors and the current practice of my operation is to zoom twice (not more than three times at most). In terms of results, reverse it: 30.8%×2=61.6%, deduct the handling fee, execute the price difference, and earn dividends. With a conservative attitude, the performance will be discounted by 40%, that is, 61.6%×60%=36.72, which is the customer's Actual (tax-free) annual income. I asked the customer, are they satisfied? If the client nodded and were confident with this rate of return, I would only use two times the leverage when providing his fund trading advice. Dear investment friends, the seemingly mysterious and complicated leverage ratio was formulated in this way.