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Every foreign exchange transaction is conducted between a pair of currencies. Each currency is marked by a unique three-letter International Organization for Standardization (ISO) code, for example, GBP stands for British pound and USD stands for US dollar. Currency pairs are represented by two ISO codes plus a separator, such as GBP/USD, where the first code stands for "basic currency" and the other stands for "auxiliary currency".
In short, exchange rate is the pricing of one currency to another. For example, GBP/USD = 1.5545 means that one unit of GBP (base currency) can be converted into 1.5545 USD (secondary currency). Traders buy and sell basic currency, and novices often confuse this basic concept.
The exchange rate is usually expressed with four decimal places, and only the Japanese yen is expressed with two decimal places. The first two digits of the four decimal places are "large numbers", and the third and fourth digits are collectively called "minutes". For example, in GBP/USD = 1.5545, the large number is 1.55, and the third and fourth decimal places 45 represent points.
price variance
Like other financial commodities, there are buying price (seller's asking price) and selling price (buyer's bidding price) in foreign exchange transactions. The difference between the buying price and the selling price is called "price difference".
The price difference has a specific form. For example, GBP/USD = 1.5545/50, which means that the buyer's bid for GBP/kloc-0 is 1 .5545, while the seller's asking price is 1.5550. The price difference is 5 points.
Major currency pairs
All currency pairs exchanged with the US dollar are called "major currency pairs". The four major currency pairs are:
Euro/dollar is euro/dollar.
Pound/dollar is pound/dollar (also known as "cable").
USD/JPY is USD/JPY.
USD/CHF is USD/CHF.
cross rate
Currency pairs that are not dollars are called "crosses". We can get the cross exchange rates of pound, euro, yen and Swiss franc from the above major currency pairs. The exchange rate changes between all currencies must be coordinated, otherwise "round-trip transactions" and zero-risk profits may occur.
Buying is selling.
Every time you buy the base currency, it means selling the secondary currency accordingly. Similarly, selling the base currency means buying the secondary currency at the same time. For example, when a trader sells 1 pound, he also buys 1.5545. Similarly, when a trader buys 1 pound, he also sells 1.5550 USD.
In order to explain this equivalence relationship, we can get the exchange rate of USD/GBP by converting the exchange rate of GBP/USD and exchanging the buyer's bid and the seller's asking price accordingly.
USD/GBP = (11.5550) Buyer's bid; (11.5545) Seller's asking price = 0.643 1/33
This means that the buyer's bid for 1 dollar is 0.643 1 pound (or 64.3 1 point), and the seller's asking price for 1 dollar is 0.6433 pound (or 64.33 points). Please note that at this time, the US dollar has become the base currency, with a difference of 2 points.
Basis of buying and selling
Transaction Unit-Lot
As mentioned above, every foreign exchange transaction is to exchange one currency for another. The basic trading unit of foreign exchange margin investors is called "hand", which consists of 6,543,800 units of base currency (but some brokers can arrange mini-hand trading, with 654.38+ 00,000 yuan as the basic trading unit).
Buying a pound/dollar means buying 65,438+million pounds at the price of 1.5852 dollars to 1 pound, which is158,520 dollars.
Similarly, a lot of GBP/USD sold went from 1 GBP to 1.5847 USD, which is 158470 USD.
cash deposit
Investors who buy a unit (hand) of GBP/USD do not need to give the full value of the transaction, such as 158520 USD mentioned in the above example. As long as the buyer opens a "margin" account, he can reach the transaction scale.
Because selling one currency means buying another currency at the same time, the trader who sells a single pound/dollar actually buys a certain amount of dollars, so he must also come up with a deposit corresponding to the transaction value (158470 USD).
Usually the margin requirement is 0%-5% of the potential value of the 65438+ transaction. Currency Currency depends on the investor's trading broker. If you trade through an American broker, you may have to open a US dollar deposit account, even if you are a British resident.
Suppose your margin account is $5,000 and the margin requirement is 2.5%, you can establish a position worth $200,000. The value of your position will be constantly evaluated. If the amount in the margin account is lower than the minimum amount required to support your open position, you may need to add funds to the account. This is the so-called "margin notice".
If you trade in a currency other than that accepted by the broker, you must convert your profit and loss into an acceptable currency. For example, if you trade USD/JPY, your profit and loss will be marked in JPY. If your broker's local currency is USD, your profit and loss will be converted into USD according to the relevant USD/JPY exchange rate.
Short and long
When you buy a currency, you are "long" the currency. Multi-warehouse is established according to the seller's asking price. So if you buy a single pound/dollar when the quotation is 1.5847/52, then you will buy 65438+ million pounds when 1 pound is/.5852.
When you sell a currency, you are "shorting" the currency. Short positions are established according to the buyer's bid, which is 1 GBP to 1.5847 USD in our example.
Because of the symmetry of currency trading, you short another currency and make more at the same time. For example, if you change 654.38 million+pounds into dollars, you are shorting pounds and making more dollars.
To close/close/close an account
A vacant position means that the position is valid and in progress. As long as you hold a position, its value will fluctuate with the market exchange rate, and all the profits and losses will be reflected in your margin account. Closing a position means trading in the same currency pair. For example, if you make an extra pound/dollar at the seller's asking price, you should short a pound/dollar at the buyer's asking price to close the position.
When you start and end a transaction, you must complete it through the same intermediary. You can't establish a GBP/USD position in A brokerage firm, and you can only close your position through B brokerage firm.
Operation example
Tend to rise
Suppose the current exchange rate of GPB/ USD is 1.5847/52.
You expected the pound to appreciate against the dollar, so you bought a bill at the seller's asking price of 1 pound to 1.5852 dollars, which is 65438+ million pounds.
The contract value is 100000 x 65438 USD +0.5852 = 65438 USD +058520. The broker's requirement for US dollar deposit is 2.5%, so you must ensure that there is at least 2.5% X 158520 USD = 3963 USD in your deposit account.
If GBP/USD really appreciates to 1.6000/05, you decide to close your position by selling GBP and buying back USD at the buyer's buying rate. Your income is as follows:100000x (1.6000-1.5852) USD =1.480 USD, which is equivalent to one point earned 10 USD.
Your rate of return is 1, 480/3,963 = 37.35%, which shows the positive effect of buying with margin account.
If GBP/USD falls to 1.5700/75, your losses are as follows:
100000x (1.5852-1.5700) USD = 1.520 USD, with a loss of 38.35%.
This example tells us that margin trading can expand your profit or loss rate.
Tend to fall
You expected the pound to fall from GBP/USD = 1.5847/52, so you decided to sell a single GBP/USD.
The contract value is 100000 x 1.5847 USD = 158470 USD. In fact, you sold 65438+ million pounds and bought 158470 dollars.
The dollar deposit required by your broker is 2.5% x 158470 = 396 1.75.
When GBP/USD drops to 1.5555/60, your book income is as follows:
100000x (1.5847-1.5560 USD) = 2870 USD.
Add the book income of $2,870 to your margin account, and you now have $6,831.75. So you can set up a position worth $273,270.
But if GBP/USD starts to rise, when the exchange rate reaches 1.6000/05, your book loss is as follows:
100000x (1.6005-1.5847) USD = 1.580 USD.
Your margin account will be reduced by 1.580 USD to $2,381.75 USD, and only open contracts with a value of $2.38 1.75 USD/0.025 = $95,270 USD will be supported. And the amount required for your transaction is: 100000 x 1.6005 USD = 160050 USD. So your "fund shortage" amount is 160050 -95270 = 64780. The brokerage will send you a deposit notice, informing you to make up 2.5% x 64780 = 1.6 19.50. If you don't renew the fee immediately, the broker will liquidate your position.
Finally, the exchange rate at clearance is GBP/USD = 1.5720/25, and your income is as follows:
100000x (1.5847-1.5725) USD = 1.220 USD.
Now that you have no open position, you can withdraw all the $5, 1, 8 1.75 from the trading account in cash. Or at this point, you have enough margin to support a position worth $207,270.
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