Lesson 3: Introduction to Forex Trading

Foreign exchange is produced along with international trade, and foreign exchange trading is a tool for a global settlement of creditor's rights and debts. However, in the past ten years, foreign exchange transactions have doubled and have undergone significant changes in substance. Foreign exchange trading is a tool of international trade and has become the most crucial financial commodity globally. The types of foreign exchange transactions have also become increasingly diversified as the nature of foreign exchange transactions changes.

Foreign exchange transactions can be divided into cash, spot, contract spot, futures, options, and forward transactions. Specifically, cash transactions are transactions between tourists and those who need foreign exchange cash for various other purposes, including money, foreign exchange traveler’s checks, etc.; spot transactions are between large banks and large banks acting on behalf of large customers. After the transaction is concluded, the payment and delivery of funds shall be completed within two business days at the latest; contract spot trading is a way for investors to sign a contract with a financial company to buy and sell foreign exchange, which is suitable for public investment; futures trading is based on The agreed time, and the transaction is conducted at a determined exchange rate. The amount of each contract is fixed; an option transaction is a transaction carried out in advance for the option of buying or selling a particular currency in the future; a forward transaction is an agreement by the contract. The delivery is handled on the date, the contract can be large or small, and the delivery period is more flexible.

From the perspective of the number of foreign exchange transactions, the proportion of foreign exchange transactions arising from international trade in the total foreign exchange transactions is constantly decreasing. According to statistics, the current balance is only about 1%. So, it can be said that the mainstream of foreign exchange transactions is an investment, which aims to make profits from the fluctuation of foreign exchange prices. Therefore, spot, contract spot, and futures transactions account for a more significant proportion of foreign exchange transactions.

Spot foreign exchange transactions (actual trading)

Spot transactions are transactions between large banks and large banks acting on behalf of large customers. After the transaction is agreed upon, the payment and delivery of funds will be completed within two business days at the latest.

This article mainly introduces the personal foreign exchange transactions launched by domestic banks for individuals and is suitable for the participation of public investors.

Personal foreign exchange transactions, also known as foreign exchange treasures, refer to transactions in which individuals entrust a bank to purchase and sell one foreign currency into another foreign currency concerning the real-time exchange rate of the international foreign exchange market. Since investors must hold a sufficient amount of foreign currency to sell to trade. Compared with the internationally famous foreign exchange margin trading, it lacks the short-selling mechanism and financing leverage mechanism of margin trading, which is also called an actual transaction.

Since the Shanghai Industrial and Commercial Bank of my country began its foreign exchange trading business in December 1993, with the substantial growth of Chinese residents' individual foreign exchange deposits, the introduction of new trading methods and changes in the investment environment, the private foreign exchange trading business has developed rapidly. The largest investment market outside of stocks.

, Many banks, including industry, agriculture, China, China Construction, Communications, Zhao, and China Everbright, have launched personal foreign exchange trading businesses. It is expected that the competition among banks for personal foreign exchange trading business will be more intense, the services will be more complete, and foreign exchange investors will enjoy better benefits.

With the foreign exchange in their hands, domestic investors go to any of the banks mentioned above to open an account, deposit funds, and conduct foreign exchange transactions through the Internet, telephone, or over the counter. For more detailed information, please refer to the actual trading column of this website.

Contract spot foreign exchange transactions (deposit transactions)

Contract spot foreign exchange trading, also known as foreign exchange margin trading, deposit trading, virtual trading, refers to investors and financial companies (banks, dealers, or brokers) that specialize in foreign exchange trading, signing contracts for entrusted trading of foreign exchange, and paying A specific ratio (generally no more than 10%) of trading margin can be used to buy and sell foreign exchange of 100,000, hundreds of thousands or even millions of dollars at specific financing multiple. Therefore, this type of contract trading is only a written or verbal commitment to a particular price of a specific foreign exchange and then waits for the cost to rise or fall, settle the transaction, obtain profit from the changed spread, and of course, also bear it. The risk of loss is reduced. Because this kind of investment requires more or less capital, it has attracted the participation of many investors in recent years.

Foreign exchange investment appears in contracts, and the main advantage is to save the amount of investment. When buying and selling foreign exchange in the form of a contract, the investment amount is generally not higher than 5% of the contract amount. The profit or loss paid is calculated based on the amount of the entire contract. The amount of foreign exchange contracts is determined according to the type of foreign currency. Specifically, the amount of each contract is 12,500,000 yen, 62,500 pounds, 125,000 euros, and 125,000 Swiss francs, and the value of each contract is about 100,000 US dollars. The amount of each contract in each currency cannot be changed according to the requirements of investors. Investors can buy and sell several or dozens of contracts according to their deposit or margin. Under normal circumstances, investors can buy and sell a contract with a margin of US$1,000. When the foreign currency rises or falls, the investor's profit and loss are calculated based on the contract amount, which is US$100,000. Some people think that the risk of buying and selling foreign exchange in the form of a contract is more significant than buying and selling, but it is not difficult to see the difference when we carefully compare the two. Please see the table below for details.

Hypothesis: buy Japanese yen when 1 U.S. dollar is exchanged for 135.00 Japanese yen
Real-buy and real-sale margin form
Buy 12,500,00 yen for US$92,592.59 US$1,000.00
If the yen exchange rate rises by 100 points
Profit US$680.00 US$680.00
Profit rate 680/92,592.59=7.34% 0 680/1000=68%
If the yen exchange rate drops by 100 points
Loss US$680.00 US$680.00
Loss rate 680/92,592.59=7.34% 0 680/1000=68%

It can be found from the above table that the amount of profit and loss for real-buying and real-selling and margin trading is the same. The difference is the difference in the number of funds invested by investors, and the requirements for real-buying and real-selling are Investing more than 90,000 U.S. dollars to buy and sell 12,500,000 yen. Still, only 1,000 U.S. dollars in the form of margin, the difference in the investment between the two is more than 90 times. Therefore, taking a contract is more suitable for investors with a small investment and large output, which is more suitable for public investment and can win more profits with smaller funds.

However, special attention should be paid to the trading of foreign exchange in the form of margin. Although the margin is small, the actual amount of funds is enormous, and the daily fluctuation of foreign exchange rates is considerable. If investors judge the trend of foreign exchange, Mistakes can easily cause the entire security deposit to be wiped out. Take the above table as an example. The same is the loss of 100 points, and the investor’s 1,000 USD will lose 680 USD. If the yen continues to depreciate and the investor does not take timely measures, it will cause the margin to be lost and may require additional investment. Therefore, high-yield and high-risk are equal, but risks can be managed and controlled if investors use proper methods.

In contract spot foreign exchange transactions, investors may also receive considerable interest income. The interest calculation method of contract spot foreign exchange is not based on investors' actual investment amount but the contract's amount. For example, suppose an investor invests US$10,000 as a margin and buys a total of 5 arrangements of British pounds. In that case, interest calculation is not calculated based on the investor's US$10,000 invested. Still, based on the total value of 5 contracts of British pounds, that is Multiply the contract value of the British pound by the number of contracts (£62,500*5), so that the interest income is considerable. Of course, if the exchange rate does not rise but falls, investors will not be able to offset the loss of price changes even though investors have taken an interest.

The combination of financial and interest does not mean that there is interest in buying and selling any foreign currency. Only when purchasing high-interest foreign currencies can there be interest income. Selling high-interest foreign currencies not only has no interest income, but investors must also pay interest. Since interest rates in various countries are frequently adjusted, the payment or collection of interest in different currencies in different periods is separate. Investors should base on the interest collection standards announced by dealers engaged in foreign currency transactions.

There are two calculation formulas for interest. One is the foreign currency used for direct pricing, such as Japanese yen and Swiss francs, and the other is the foreign currency used for indirect pricing, such as Euros, British pounds, and Australian dollars.

The interest calculation formula for Japanese Yen and Swiss Franc is:

Contract amount1/market price interest rate number of days/360number of contracts

The interest calculation formula for Euro and British Pound is:

Contract amount * market price * interest rate * number of days / 360 * number of contracts

The contract spot foreign exchange trading method can either buy at a low price and sell it after the price rises or sell it at a high price and buy after the price drops. The cost of foreign exchange always rises or falls in waves. This method of buying first and selling first can make money in the rising market and make money in the falling situation. If investors can use this method flexibly, whether the demand rises or falls, it can be left and right. So, how do investors calculate the profit and loss of contract spot foreign exchange trading? There are three main factors to consider.

First, we must consider changes in foreign exchange rates. Investors making money from exchange rate fluctuations can be the primary way to obtain profits from contract spot foreign exchange investments. Points calculate the profit or loss. The so-called points are the exchange rate. For example, if 1 U.S. dollar is exchanged for 130.25 yen, 130.25 yen can be 13025 points. When the yen drops to 131.25, it will fall by 100 points. At this price point, each point represents US$6.8. The value represented by each end of each currency, such as the Japanese Yen, the British Pound, and the Swiss Franc, is also different. In contract spot foreign exchange trading, the more points you earn, the more profits you make, and the fewer points you lose, the less you lose. For example, an investor buys one contract of British pound at the price of 1.6000, and when the pound rises to 1.7000, the investor sells this contract, that is, earns 1,000-pound pounds, and the profit is as high as $6,250. Another investor bought the pound at 1.7000, and when the pound fell to 1.6900, he immediately discarded the contract in his hand. Then, he only lost 100 points; that is, he lost $625. Of course, the number of points earned and lost is directly proportional to profit and loss.

Secondly, we must consider the interest expenditure and income. This article has stated that buying high-interest foreign currency first will get a certain amount of interest, but rather, selling high-interest foreign currency will pay a certaiparticularest. Suppose it is a short-term investment, such as the end of the day's trading or the end of one or two days. In that case, there is no need to consider interest expenses and gains because interest expenses and payments in one or two days are minimal and have little impact on profit or loss. For medium and long-term investors, the interest issue is an integral part of life that cannot be ignored. For example, the investor first sells the pound at the price of 1.7000, and one month later, the pound is still at this position. If you pay 8% interest for selling the pound, the monthly interest payment is as high as $750. This is also a lot of expenditure. Judging from the current investment situation of ordinary residents, many investors see more interest income while ignoring the trend of foreign currencies, so they all like to buy high-interest foreign currencies. As a result, they lose more with less. For example, when When the pound fell, investors purchased the pound. Even if a contract collects interest of $450 per month, the pound fell by 500 points a month and lost $3,125 in moments. The interest income cannot make up for the loss caused by the decline in the pound. Therefore, investors should put the trend of foreign exchange rates first and put interest income or expenditure in the second place.

Finally, we must consider the expense of handling fees. Investors buy and sell foreign exchange contracts through financial companies. Therefore, investors must calculate this part of the expenditure into the cost. The commission charged by financial companies is based on the number of investors' purchase and sale contracts, not profit or loss. Therefore, this is a fixed amount.

The above three aspects constitute the calculation method for calculating the profit and loss of contract spot foreign exchange.

The profit and loss calculation formula for the Japanese Yen and Swiss Franc is:

Contract amount*(1/sell price-1/buy price)*number of contracts-handling fees +/- interest

The profit and loss calculation formula for Euro and British Pound is:

Contract amount * (selling price-buying price) * number of contracts-handling fee +/- interest

As an investment tool, foreign exchange margin trading is legal in Europe, America, Japan, Hong Kong, Taiwan, and other countries and regions, and dealers and trading activities are subject to government supervision.

Futures and foreign exchange trading

Futures foreign exchange trading refers to purchasing and selling a certain amount of another currency in US dollars on an agreed date at a determined exchange rate. Futures and foreign exchange trading have similarities and differences with contract spot trading. Contract spot foreign exchange trading is carried out through banks or foreign exchange companies, and futures foreign exchange trading is carried out in a particular futures market. At present, the world's futures markets mainly include Chicago Futures Market, New York Mercantile Exchange, Sydney Futures Market, Singapore Futures Market, London Futures Market. The futures market must consist of at least two parts: the trading market and the clearing center. After the buyer or seller of the futures trades on the exchange, the clearing center becomes its counterparty until the actual delivery of the futures contract. Futures foreign exchange and contract foreign exchange transactions are related to a certain degree and have specific differences. From the comparison between the two, the following describes the particular operation of futures foreign exchange.

The number of futures foreign exchange transactions is the same as the contract spot foreign exchange transactions. Futures and foreign exchange trading is at least one contract, and the amount of each contract is different for different currencies. For example, a pound contract is 62,500 pounds, Japanese yen is 12,500,00 yen, and euros are 125,000 euros.

There are strict regulations on the delivery date of futures foreign exchange contracts, which are not available in contract spot foreign exchange transactions. The delivery date of the futures contract is stipulated as the Wednesday of the third week of March, June, September, and December of the year. In the same way, there are only four contract delivery days in a year, but trading can be carried out at other times, but delivery is not possible. If the bank is closed on the delivery day, it will be postponed by one day.

The price of a futures foreign exchange contract is expressed in a foreign currency equal to the number of dollars. Therefore, in addition to the British pound, the futures foreign exchange price and the contract foreign exchange rate are precisely the reciprocal of each other. For example, the December Swiss franc futures price is 0.6200, and the joint is exactly 1.6126.

There is no issue of interest expenditure and income in the trading of futures and foreign exchange. Investors will not get interested in buying or selling any foreign currency, and of course, they do not have to pay interest.

The buying and selling method of futures foreign exchange is the same as that of contract spot foreign exchange. You can either buy first and then sell, or sell first and then buy, which can be a two-way choice.

The development of online foreign exchange transactions

Since 1997, with the development of the Internet, online foreign exchange margin trading has taken the world by storm and has become a popular way of foreign exchange transactions. Not only have inter-bank transactions begun to adopt online methods, but more and more individuals are participating in the foreign exchange market through the Internet.

The development of online foreign exchange transactions has broken geographical limitations, making it easier for individuals and small institutional investors to rely on local brokers to participate in foreign exchange transactions to conveniently earn foreign exchange investments.

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 puts online foreign exchange margin trading on the track of standardized development.

At present, the foreign exchange dealers that have been registered by the US CFTC (Commodity Futures Trading Commission) include (in order of passage time) FXCM, MGFG, GAIN CAPITAL, CMS-FOREX, etc.

The history and status quo of the foreign exchange market in mainland China

During the blind development of the futures market from 1992 to 1993, many Hong Kong foreign exchange brokers went to the mainland to conduct foreign exchange futures trading business without approval. They attracted the participation of a large number of domestic enterprises and individuals.

Since most domestic participants do not understand the foreign exchange market and foreign exchange transactions, blind participation has led to large areas and significant losses, including a large number of state-owned enterprises.

In August 1994, the China Securities Regulatory Commission and other four ministries jointly banned foreign exchange futures trading (margin) completely. Since then, the management department has always held a negative and severely cracked down on domestic foreign exchange margin trading.

At the end of 1993, the People's Bank of China began to allow domestic banks to carry out personal foreign exchange trading business. By 1999, with the stock market regulation, the profit margin for trading stocks was significantly reduced, and some investors began to enter the foreign exchange market. Domestic foreign exchange actual trading gradually became an emerging investment method and entered a stage of rapid development. According to CCTV reports, foreign exchange trading has become the most significant investment market besides stocks.

Compared with the domestic stock market, the foreign exchange market is much more standardized and mature. The daily trading volume of the foreign exchange market is about 1,000 times that of the domestic stock market. Therefore, even though the trading rules are not entirely in line with international practices, individuals established by domestic banks Real foreign exchange trading business are still attracting more participants.

Generally speaking, most domestic foreign exchange investors participate in actual transactions by domestic banks and margin trading; because the country has not yet opened up and the country's foreign exchange control policies, domestic investors still need time.