Currency buying and selling - foreign exchange market

The foreign exchange market (FX or Forex) is one of the largest and most liquid financial markets in the world, which can be simply defined as a market that can compete with other currenciesThe commodity of exchanging assets such as gold and crude oil refers to the buying and selling of currency, and is also one of the fastest growing markets in the world. From 2007 to 2010, the trading volume of the foreign exchange market increased by 20%. As of April 2010, the daily average trading volume in the foreign exchange market was close to $4 trillion.

In fact, trading in the foreign exchange market is very similar to that in the stock market -Buy low and sell high. But the advantage of foreign exchange trading is that you don't have to choose from thousands of companies and industries, and foreign exchange trading is much simpler than choosing which company.

Exchange rate mechanism

There are usually two types of foreign exchange mechanisms

Flexible exchange rate mechanism

In a flexible exchange rate mechanism, currencies float freely and their value is determined by market forces.

Fixed exchange rate mechanism

In the fixed exchange rate mechanism, the currency is not allowed to fluctuate freely. On the contrary, the value of a currency is fixed at a specific level for a single currency, such as the US dollar; Or fix a basket of currencies at a specific level.Under the fixed exchange rate mechanism, the local central bank intervenes by using foreign exchange reserves to prevent exchange rate fluctuations.

Main factors affecting exchange rates

The market value of free floating currency is determined by many factors, including international trade, economic and political environment, interest rate, short-term money supply and demand, etc.

Unlike many other asset markets, the foreign exchange market is a complete market where exchange rates can freely rise and fall.

Over the Counter Trading (OTC)

The foreign exchange market is an over-the-counter trading market, which means that there is no actual trading venue and no prescribed trading and clearing time when both buyers and sellers make transactions in this market. Foreign exchange market through banksThe electronic trading network between enterprises and individuals operates 24 hours a day without interruption. Foreign exchange traders constantly negotiate with each other, and the final buy/sell price is entered into a computer program and displayed on the official quotation screen.The foreign exchange quotation between banks is called the interbank exchange rate

Exchange market participants

There are different types of participants in the foreign exchange market who pursue different goals. This is despite the fact that the currency market is referred to as a "zero sum game" (meaning that in the game, one party's gain necessarily means the other party's loss),But there are still many reasons for profit opportunities. Therefore, the foreign exchange market can be seen as a delicious pie that everyone can share. Traditionally, banks were the main participants in the foreign exchange market, and in terms of market share,They are still the largest traders in the current currency market. The increase in transparency has made the foreign exchange market more fair than before. Nowadays, almost everyone can participate in the foreign exchange market and be exposed to the same low difference in exchange rates as the interbank market.Although banks remain the main participants in the foreign exchange market, in the past 10 years, a large number of emerging market makers, such as hedge funds and commodity trading advisors, have emerged. The central bank also plays an important role in the foreign exchange market,Multinational companies also usually have a great interest in holding foreign exchange risk exposure. In the past 10 years, the number of retail investors has rapidly expanded, although specific numbers are difficult to calculate,

However, it is estimated that retail investors have a foreign exchange market share of up to 20%.

Spot foreign exchange and foreign exchange futures

Most foreign exchange transactions are completed off the exchange, and there is also an active and successful futures market. The daily trading volume of foreign exchange futures on the Chicago Mercantile Exchange is approximately $85 billion.Several other exchanges also offer foreign exchange futures trading. Generally speaking, spot foreign exchange adopts a T+2 settlement method, where open trading positions are settled after two working days. The term of foreign exchange futures is approximately 3 months,Usually settled quarterly in March, June, September, and January and December. This is also why futures prices often appear different from spot prices. In fact, the correlation between the two reached 100%.Due to the extremely efficient operation of the foreign exchange market, it is difficult to arbitrage through price differences. Foreign exchange futures include currency to forward exchange rates. Usually, the quotation method for foreign exchange futures is the US dollar against other currencies, in other words,The futures price is the reverse value of the spot exchange rate, plus the swap price as of the maturity date. Similarly, foreign exchange futures are not as complex as they sound. In summary, both over-the-counter trading and futures markets have their own strengths.The over-the-counter market is more flexible and has lower entry barriers.

Advantages of Foreign Exchange Trading

24-hour uninterrupted trading

The foreign exchange market never sleeps, and trading almost runs 24 hours a day, 7 days a week. Most transactions are completed between the opening of the New Zealand market on Monday, Sunday evening in Europe, and the closing of the US market on Friday evening.

Liquidity

The scale of the foreign exchange market is huge and still growing day by day. At present, the daily transaction amount exceeds 3.2 trillion US dollars. The rapid development of technology provides almost everyone with the opportunity to enter the market. Retail investors swarmed in.

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Because it is more liquid, the marginal revenue rate of the foreign exchange market is higher than that of the stock market -- the foreign exchange price is changeable, and the volatility is lower.

Low point difference

The foreign exchange spread, which is the price difference between buying and selling, is very small. This conclusion can be easily drawn by comparing the 2-point spread between the euro and the US dollar with even the most active trading stock. Additionally, for wealthy individuals,In the foreign exchange market, it is possible to obtain better quotes than in the stock market. In essence, the spread is the inherent cost hidden in foreign exchange trading, and the spread in the foreign exchange market is very low.The promotion and popularization of technology have enabled almost everyone to participate in low spread foreign exchange trading.

No commission, no transaction costs

Most over-the-counter foreign exchange transactions are commission free, and considering the low spread, the inherent cost of foreign exchange transactions is much lower than other assets such as stocks.

Profitable regardless of fluctuations

Foreign exchange is a complete market, and exchange rates are prone to fluctuations. If a trader believes that a certain currency will depreciate, they can almost freely choose to sell. However, if the position is held for more than one day,So we must consider the costs associated with holding positions. In short, whether buying or selling, whether the market fluctuates upwards or downwards, there is potential profit potential in the foreign exchange market.

Equal access to market information

Although Europe and the United States have already introduced the best management mechanisms, few would deny that professional traders and analysts in the stock market have a huge competitive advantage over individual traders. As far as the foreign exchange market is concerned,The exclusive advantage of large banks may only be data on capital flows. The foreign exchange market is a very fair and fair market, where almost all participants have access to ever-changing market information.

【 EBC Platform Risk Reminder and Disclaimer 】: There are risks in the market, and investment needs to be cautious. This article does not constitute investment advice.