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Introduction to Foreign Exchange Knowledge

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Introduction to Foreign Exchange Knowledge I. Basics Major Currency Symbols: RMB RMB cashback forex JPY EUR GBP GBP CHF CHF Major Currency Pairs: All cashbackforexexness pairs that are convertible with the US dollar are called major currency pairs The four major currency pairs are: EUR/USD that Forex rebate for Exness EUR/USD (abbreviated EU or E/U, the same below) GBP/USD that is GBP/CHF USD/JPY is USD/JPY USD/CHF is USD/CHF Trad ForexrebateforExnessg exchange rate: the exchange rate in short is a currency denominated for another currency for example GBP/USD= forexcashrebate.5545 means that one unit of GBP (base currency) can be exchanged for 1.5545 USD (secondary currency) Traders buy forexrebates sell the base currency, beginners often get confused with this basic concept Exchange rate Usually expressed as four decimal places, only the Japanese yen to two decimal places in the four decimal places in the first two is the big number, and the third and fourth place together called the point For example, in GBP/USD = 1.5545, the big number is 1.55 and the third and fourth decimal 45 represents the point spread (spread): as with other financial commodities, foreign exchange transactions have a bid price (sellers asking price) and an offer price (buyers offer) bid price and The difference between the bid and ask price is called the spread (spread) The spread has a specific form to express, for example, GBP/USD = 1.5545/50 means that the buyers bid for 1GBP is 1.5545USD, while the sellers ask price is 1.5550USD in which the spread (spread) is 5 points Cross rates: non-US dollar currency pairs are called crosses We can get from the above major currency pairs We can derive cross rates for the British pound, the euro, the Japanese yen and the Swiss franc from the major currency pairs mentioned above. The exchange rate changes between all currencies must be coordinated, otherwise there could be round-tripping and zero-risk profit-taking. Similarly, when a trader buys 1GBP, he also sells 1.5550USD To explain this equivalence, we can convert the GBP/USD rate and swap the buyers bid and sellers ask accordingly to arrive at the USD/GBP rate USD/GBP = (1/1.5550) buyers bid; (1/1.5545) sellers ask = 0.6431/ 33 This means that the buyers bid for 1USD is 0.6431GBP (or 64.31 pips) and the sellers offer for 1USD is 0.6433GBP (or 64.33 pips) Please note that at this point the USD becomes the base currency and the difference is 2 pips Trading unit (lot) Each foreign exchange transaction is an exchange of one currency for another FX margin investors basic trading unit called a lot. By 100,000 units of the base currency (but some brokers can arrange to do with mini-lot trading, to 10,000 yuan as the basic unit of trade, or 0.1 lot) to buy a lot of GBP / USD that is 1.5852 U.S. dollars to 1 pounds to buy 100,000 pounds, counting 158,520 U.S. dollars Similarly, the sale of a lot of GBP / USD that is 1 pounds to 1.5847 U.S. dollars The investor who buys one unit (lot) of GBP/USD does not need to put up the full value of the transaction, as mentioned in the previous example of 158,520 USD buyers only need to open a margin account to reach the size of the transaction because selling one currency means buying another at the same time. A trader who sells a single GBP/USD is actually buying a certain amount of USD, so he or she must also put up margin corresponding to the value of the trade (158,470USD). Assuming your margin account is $5,000 and the margin requirement is 2.5%, you can open a position worth $200,000. currency is not the currency accepted by the broker, you must convert your profit and loss into an acceptable currency For example, suppose you are trading USD/JPY, your profit and loss will be marked in Japanese yen If your brokers home currency is the U.S. dollar, then your profit and loss will be converted to U.S. dollars based on the relevant USD/JPY exchange rate II. Explanation of terminology Shorting and going long: When you buy a currency, you are going long on that currency If you buy a single GBP/USD when the offer is 1.5847/52, then you will buy 100,000 GBP at 1 GBP to 1.5852 USD. When you sell a currency, you are taking a short position in that currency at the buyers offer, in our case 1 GBP to 1.5847 USD. For example, if you exchange £100,000 for dollars, you are short the pound and long the dollar. Bullish: Let the current GPB/USD exchange rate be 1.5847/52 You expect the pound to appreciate against the dollar, so you buy (go long) with the sellers asking price of £1 to $1.5852 a single contract value of £100,000 is 100 The brokers margin requirement for USD is 2.5%, so you must ensure that you have at least 2.5% in your margin account X 158,520USD = 3,963USDGBP/USD really appreciates to 1.6000/05, you then decide to buy back USD by selling GBP at the buyers bid rate. You close your position as follows: 100,000X(1.6000-1.5852)USD=1,480USD, which is equal to $10 a point, and your return is 1,480/3,963=37.35%, which shows the positive effect of buying with a margin account. So you decide to sell (short) a single GBP/USD contract worth 100,000 X 1.5847USD = 158,470USD, actually you sold 100,000 GBP and bought 158,470USD Your brokers margin requirement in USD is 2.5% X 158,470USD = 3,961.75USD GBP/USD USD falls to 1.5555/60, so your book gain is as follows: 100,000X(1.5847-1.5560USD)=2,870USD 2,870USD book gain added to your margin account, you now have 6,831.75USD so you can open a position worth 273,270USD. The exchange rate is GBP/USD = 1.5720/25 and your gain is as follows: 100,000X(1.5847-1.5725)USD = 1,220USD Now that you have no more open positions, you can withdraw the entire $5,181.75 in your trading account in cash or you have enough margin to support a position worth 207.270USD, 270USD position