What is foreign exchange?

Chapter 1: What is Forex?

Of all the financial market transactions, the largest volume of non-foreign exchange. The global trading volume per trading day is about 4 trillion US dollars, and its scale can be seen from this figure.

Foreign exchange trading (FX) is the exchange of one country's currency for another, and you sell the currency you hold (such as RMB) and buy another currency (such as USD).

Just like when you exchange foreign currency on vacation abroad, the bank, post office or currency exchange office in the airport will provide two quotations: one is the price of selling US dollars to you; the other is to buy dollars from you and pay you the price of RMB.

Bulk foreign exchange transactions usually involve only three currencies, namely the US dollar, the euro and the Japanese yen, for example: US dollar-euro, euro-yen, etc. Of course, foreign exchange transactions can also be conducted between any two fiat currencies in the world.

Chapter 2: Why Forex Trading?

It depends on the circumstances. Some people purchase goods or services in order to obtain actual funds, which may include industrial products or securities products, such as stocks or bonds denominated in a foreign currency.

Of course, this also includes investment opportunities. You may choose to buy foreign currency because it earns more interest than the currency you have in your hand.

Then there is the speculative profit. The reason you sell the "base currency" to buy another currency is that you want to get more of the base currency on the second sale.

Chapter 3: Who Is Trading Forex?

The biggest buyers and sellers of foreign exchange are, of course, banks. While a bank's foreign exchange transactions may be related to its own books, most of its transactions provide customers with services such as cash exchange, investment or speculation.

There are hundreds of banks and brokerage firms engaged in foreign exchange trading, but the foreign exchange market is dominated by the following "big five": Citigroup, Deutsche Bank, Barclays, JPMorgan and UBS. In 2015, the sum of these five companies accounted for more than half of the global transaction volume.

Chapter 4: Foreign Exchange "Secret"

Forex trading belongs to the over-the-counter (OTC) market. This means that the transaction is not carried out on the stock exchange, but directly between the parties to the transaction or through the trading platform.

On trading screens and websites, currencies are displayed in short codes, such as USD-USD, EUR-EUR, JPY-JPY. The International Organization for Standardization specifies the codes for 268 different currencies.

Most foreign exchange transactions are "in stock" transactions, which means that the quotation, delivery and proceeds of the transaction are almost even completed.

Of course, the market also offers forward foreign exchange contracts. The bank or brokerage firm and you will agree on an exchange rate on the day the contract is signed, and the foreign exchange transaction will be completed at the agreed exchange rate when the contract expires.

Chapter 5: How to Trade Forex?

Banks or brokerage firms will often provide access to their online trading platforms where you can bind your bank account and start trading. In addition, there are many professional forex trading platforms that offer personal trading services.

Chapter 6: Analysis of Pros and Cons

One of the great advantages of Forex trading (compared to stocks, for example) is that you always hold assets. So if you sell dollars to buy euros, you at least hold euros.

In addition, you can earn interest from the deposit bank when you hold the purchase. If your position generates a profit, you can buy back dollars to earn the exchange rate difference.

The disadvantage of foreign exchange trading is that the exchange rate may not move as expected, resulting in a loss when the base currency is bought back. If interest rates hit rock bottom, you may not be able to earn any interest on the currency you hold.