Forex Trading Basics: How to Trade Forex

Introduction to Currencies and Currency Pairs

There are currently more than 170 currencies in the world, but we commonly see only 10 Plant around. The Forex market is large and invisible, and it is difficult to obtain accurate statistics. The most authoritative international statistics on the Forex market and Forex transactions currently come from the Bank for International Settlements' report every three years. 2013 9 In March, the Bank for International Settlements released the Triennial Central Bank Survey Report - 2013 Preliminary results of global Forex trading statistics in April". The report shows that the global Forex market transaction volume has shown significant and rapid growth in recent years. Average daily trading volume rose from $3.3 trillion in April 2007 to From US$4.0 trillion in April 2010, it reached a record high of US$5.3 trillion in April 2013.

Among various trading currencies, the U.S. dollar continues to maintain its leading position in Forex transactions, the Japanese yen's proportion rises rapidly, the euro's proportion drops the most, and the British pound's proportion continues to be 10 It fell in 2016, with the Australian dollar catching up to the Swiss franc. Generally speaking, the investment market refers to the world's most common trading currencies as "major currencies." The current major currencies are: US dollar (USD), euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Australian dollar (AUD), and Canadian dollar (CAD). Currencies other than the primary currency are called "secondary currencies". From the definition of Forex, we can know that Forex is the exchange of currencies between two countries. Therefore, Forex transactions must be composed of the currencies of two different countries, becoming a "currency pair". For example, "EUR/USD" and "GBP/AUD" are currency pairs.

Straight disk and cross disk

Each currency can form a currency pair with another currency. A currency pair containing the U.S. dollar is generally called a "straight price", which is the direct exchange rate of one currency against the U.S. dollar. Direct trading of major currencies against the U.S. dollar is generally referred to as a "major currency pair."

Therefore, the major currency pairs on the market include:

EURUSD

USDJPY USDJPY

GBP/USD GBPUSD

Australian dollar against US dollar AUDUSD

USDCHF USDCHF

US dollar against Canadian dollar USDCAD

In the above currency pairs, "/" can also be used instead of "convert", which is written as:

EUR/USD

USD/JPY

GBP/USD

AUD/USD

USD/CHF

USD/CAD

Currency pairs that do not include the U.S. dollar are called "crosses" because most international trade settlements are settled in U.S. dollars. If a currency is converted into another non-U.S. dollar currency, it needs to be calculated based on the exchange rate of the two currencies against the U.S. dollar, so it is called a cross.

The main crosses are listed below:

Euro Cross GBP Cross Japanese Yen Cross

EUR/CHF GBP/CHF EUR/JPY

EUR/GBP GBP/AUD GBP/JPY

EUR/CAD GBP/CAD CHF/JPY

EUR/AUD AUD/JPY

CAD/JPY

Introduction to the characteristics of major currencies

U.S. dollar (USD): U.S. currency. The right to issue is owned by the U.S. Treasury Department, and the specific issuance is handled by the U.S. Federal Reserve Bank (Federal Reserve). The US dollar is the most important foreign currency in the international Forex market. According to the Bank for International Settlements, in 2013 In 2010, the U.S. dollar accounted for 87% of the average daily global Forex trading volume, an increase of 2 percentage points from April 2010. The ratio to the U.S. dollar peaked in 2001, with the share of transactions reaching 89.9%, then declined slightly, and then rebounded after 2010. Overall, the U.S. dollar’s share of global Forex transactions is far ahead, fluctuating around 85%, which is about 2.5% of the euro. times. The international status of the U.S. dollar is also reflected in the following aspects: 1) The U.S. dollar is the main asset reserved by central banks around the world; that is, the Forex reserves of various countries are mainly composed of U.S. dollars; 2) The world's major traded commodities are almost all denominated and settled in U.S. dollars; 3) The vast majority of international debt instruments are denominated in U.S. dollars.

Euro (EUR): Eurozone currency, the euro was officially put into circulation in January 2002, July 2002 It became the only legal tender currency in the Eurozone. The original currencies of the euro area countries, such as the German mark and the French franc, are no longer used. The euro is the second most traded currency in the world, after the US dollar.

Since 2001, the euro has ranked second in total global Forex transactions. From 2001 to 2007, its average daily trading volume market share basically remained at around 37%. reached a peak of 39.1% in 2016. However, statistics from the Bank for International Settlements in 2013 show that the euro’s share dropped significantly to only 33.4%, a decrease of 5.7% from 2010. percentage points, the largest decline among the world's major currencies. Japanese Yen (JPY): Japanese currency, issued by the Bank of Japan. According to the Bank for International Settlements, the Japanese yen ranks third in global Forex trading volume. Bit. The Japanese yen has seen the largest increase in trading volume among the world's major currencies over the past three years. 2013 was up 63% from 2010, with JPY/USD trading volume alone surging by 70%. 2013 In 2010, the Japanese yen’s share of the global average daily Forex trading volume increased from 19% in 2010 to 23%, an increase of 4 percentage points, exceeding the growth rate of other major currencies such as the US dollar and the euro. International trade is vital to Japan. Because on the one hand, Japan's energy is completely dependent on imports, and on the other hand, manufacturing exports are an important support for the Japanese economy. Therefore, the Japanese yen exchange rate plays a key role in Japan's economic development. Among major economies, the Bank of Japan is the central bank that intervenes most frequently in its currency exchange rate.

2. How to trade Forex

For example: buy the currency pair AUD/USD; assume that the current Australian dollar interest rate is 4.75% per annum and the US interest rate is 0.25% per annum. Then holding a long AUD/USD position will earn you a swap fee of 4.75% per year - 0.25% = 4.5%; get swap fee daily 0.012%. Transaction size and profit and loss calculation We have explained the basic concepts of Forex trading such as currencies, currency pairs, quotations, spreads, etc., and also listed the strengths of Forex trading. So, how is the profit and loss of each transaction finally calculated? To answer this question, we first need to understand the concept of position. 1) Position. The so-called position refers to the size of a transaction. The unit of Forex contract is "lot". It can be subdivided into standard hands, mini hands, micro hands and nano hands. A "standard lot" represents 100, 000 (one hundred thousand) base currency units. For example, trading one standard lot of AUD/USD would mean converting AUD 100, 000 into USD. A mini lot is 1/10 of a standard lot, which is 0.1 A micro lot is equivalent to 10, 000 base currency units. A micro lot is 1/100 of a standard lot, which is 0.01 lot. A nano lot is equivalent to 1, 000 base currency units. A nano lot is 1/1000 of a standard lot, which is 0.01 lot. 0.001 lots, equivalent to 100 currency units. Assume that you are currently bullish on USD/CHF and are ready to buy 0.5 lots. The funds you need to spend are 50, 000 USD (0.5*100, 000=50, 000). But in actual trading, you can significantly reduce the amount of money you need to pay by using leverage. If you use 200: 1 leverage, you only need to use 250 You can trade with USD (50, 000/200). Micro-lot trading and nano-lot trading lower the transaction threshold. It costs $1, 000 to trade 1 micro lot (0.01 lot) USD/JPY at Trade for just $2 with 500x leverage. Therefore relative

Compared with other investment varieties, the position size of Forex trading is very flexible.

2) Profit and loss calculation. We mentioned earlier that profits and losses in Forex trading are magnified based on the use of leverage. How is the profit and loss of each transaction calculated?

In Forex transactions, the quotation uses the U.S. dollar as the quotation currency, which means that the profit and loss calculation of the U.S. dollar in the subsequent currency pairs is relatively straightforward. In this type of trade, 1 pip is equivalent to $10.

For example, the current quotation of EURUSD is 1.36615 (selling price)/1.36632 (buying price). If you buy 1 standard lot at the current price, the opening price is 1.36632 ( Bid price); then sell the euro to close the position when the price rises to 1.37882 (selling price)/1.37596 (bidding price), the closing price is 1.37882 (selling price). The total profit in this transaction is 1.37882-1.36632=0.01250, which is 125 points.

Since each pip is worth $10, the final profit from this transaction is $125*$10=$1, 250.

In transactions with the US dollar as the base currency, the algorithm is relatively complex. Because the value of 1 pip at this time is not fixed at $10.

For example, the current quotation of USD/JPY is 101.958 (selling price)/101.976 (buying price). If you buy 1 standard lot at the current price, the opening price is 101.976 (buying price); then sell to close the position when the price rises to 102.676 (selling price)/102.688 (buying price). The closing price is 102.676 (selling price), and profit is made at this time 102.676-101.976=0.700, which is 70 points. But at this time 70 The points are Japanese yen and need to be converted into US dollars. Therefore, the trading profit and loss of the US dollar as the base currency is calculated as: (closing price - opening price) / closing price * transaction size.

In the above example of USD/JPY transaction, the final profit is (102.676-101.976)/102.676*100, 000=681.75 USD.

Please note that the above only calculates profits or losses arising from exchange rate fluctuations, and does not include overnight interest and other transaction costs. Control margin risk and margin calls. From the example in the previous part, we can see that when buying a standard lot of EURUSD, the price rises Take profit after 125 pips and earn $1250. In the Forex market, exchange rates fluctuate within hours or even minutes 125 A dot is a common trend. And the capital you need to pay to trade, depending on the leverage, might be just $200 or $500.

Make 1250 in minutes with $200 USD, this is the attraction of the Forex market. However, the risks involved cannot be ignored. If you buy EURUSD and the subsequent market moves down instead of up, you will face an equally huge loss. In trading, investors use A margin of US$200 is used to trade 1 standard lot (US$100, 000), and the profit and loss results will also be calculated based on 1 standard lot. Trade 1 standard lot of EURUSD, 1 pip is worth 10 US dollars, that is to say, as long as the price moves 20 points in the opposite direction of opening a position, you will lose 200 US dollar trading funds, and if the market continues to develop in an unfavorable direction, your account funds will continue to decrease until it is reduced to the forced liquidation level set by the dealer. At this time, you may have lost most or even all the funds in your account. When an investor's trading strategy makes a mistake, causing the account funds to drop to the point where it is difficult to maintain the current position, the dealer will issue a margin call to the investor, which requires the investor to deposit more margin into the account to maintain the current position. If an investor fails to deposit additional margin into the account on time, his or her position may be forcibly liquidated in part or in full. Therefore, avoiding losses that become unmanageable is a key point that requires extreme attention in margin trading. Setting a stop loss is a very effective tool to control the scope of losses. The trading platform provided by each broker will have a stop loss function. Stop loss is to set a maximum loss range for the position before or after opening the position. Once the loss reaches this set value, the system will automatically close the position and control the loss of each transaction within the predetermined range.

The purpose of stop loss is to avoid the potential risk of greater losses in the current transaction; at the same time, it also saves funds for the next transaction. Corresponding to stop loss is "stop profit". Take profit only sets the maximum profit range of the transaction. Once the profit reaches the set value, the system will automatically take profits. Since the market is always volatile, once the market reverses, existing profits may quickly disappear or even turn into losses. The setting of a take profit can help lock in profits and reduce potential losses caused by market fluctuations.