Foreign exchange transaction, in short, is the process of exchanging one currency for another. Such an exchange of supply and demand holds opportunities for investment and profit, but is also accompanied by risks.
Did you know? Foreign exchange market is said to be one of the largest and most liquid financial trading markets in the world. According to Bank for International Settlements (BIS) statistics, in April 2019, the average daily trading volume alone reached USD6.6 trillion.
Facing such a huge foreign exchange market, what requires our special atten- tion? How to conduct our trading? How to make profit?
What is foreign exchange? How to trade?
A simple and practical way of understanding foreign exchange transaction is that when you travel abroad, you will naturally need to convert the currency of one country into a local currency before you can use it.
But of course, foreign exchange transaction is not just about exchanging foreign currency for travel. In financial markets, it can also be a channel for individuals or companies to invest, hedge, and make profit. As many investors trade foreign exchange for profit, amount of currency traded each day can be considerable. For any investor who wants to participate in the market, it is an attractive investment opportunity with relatively low entry barriers. Of course, there are certain risks in any investment, but learning the basics is the key to grasping profitable investment opportunities.
Foreign exchange transaction usually includes cash, spot, futures and margin trading. Similar to stocks or other investment methods, in foreign exchange transaction, investors make profits by buying low and selling high, or buying high and selling low, through fluctuations in the exchange rate.
What are the benefits of foreign exchange transaction?
After you understand what foreign exchange transaction is and how it works, you might wonder what the benefits are.
- Trading 24 hours a day
The foreign exchange market is open 24 hours a day in different parts of the worlds, thus it is able to trade over a 24 hour period is due to different international time zones.
- High liquidity
Since foreign exchange transaction is fast to buy and sell, the liquidity is high, and a large amount of funds can be quickly converted in a very short period of time.
- Relatively low transaction costs
The most important part of the transaction cost of foreign exchange is the price difference between bid price and asking price, which foreign exchange broker can earn during the transaction.
The foreign exchange difference is measured by "Pip". Most currency pairs are priced out to four decimal places. For example, if the bid price is 1.2843 and the asking price is 1.2848, then the price difference is 5 pips.
- Both rising and falling prices have profit potential
Since there are no restrictions on directional trading in the foreign exchange market, if you think a currency will appreciate, you can buy more; on the other hand, if you think it will depreciate, you can sell it immediately.
Investors’ guide to Foreign Exchange Transaction
After equipping yourself with the know-hows of Foreign Exchange, the natural next step is to explore how it can work for you. Although like every market, the Foreign Exchange market comes with its fair share of cautionary tales, there are definitely ways to benefit from this market.
How to profit from foreign exchange transaction
If you want to profit from foreign exchange, here are the knowledge and steps to follow:
- Know the basic terms in foreign exchange
Before starting to do a foreign exchange trade, it is suggested to know the basic terminology in foreign exchange such as base currency, bid price and asking price and also spread, etc.
- Start with small investments
No matter what kind of investment, the biggest risk in the market is to invest a large amount of money at one time, exposing yourself to a greater risk environment. Therefore we suggest you start with small amounts, increasing trading amounts gradually and only after confirming that the strategy you're using is correct.
- Learn more, ask more, and prepare more
For most investors, foreign exchange transaction may be a relatively simple tool among many investments. But it is still necessary to understanding the basics, its risk management, and terminology. You still need to do a lot of preparation, or find a professional investment team, such as DBS's team of foreign exchange investment consultants, who will be of great help to your own investment planning and profit-making.
Upon understanding the above, are you excited about "foreign exchange transaction"? Before you get started, we recommend you learn about global currency exchange rates. Get exchange rate information from DBS. As the saying goes, keep your friends close and your enemies closer. A more thorough understanding in exchange rate will make it relatively easy to conduct foreign exchange transactions!
Key factors affecting foreign exchange rates
When conducting foreign exchange transactions, in addition to knowing global currency exchange rates, you will also need to know what will affect the exchange rates to better understand the foreign exchange markets:
- Inflation
A currency's biggest threat is inflation, which can greatly affect the exchange rate. When the inflation rate is relatively low, the price of various goods and services in the country rises slowly, thereby increasing the value of the currency; By contrast, countries with higher inflation, tend to devalue their currencies and have higher interest rates.
- Interest rate
Changes in interest rates will affect the value of currencies. From the previous point, we can see that foreign currency exchange rates, inflation, and interest rates are closely related. When interest rates rise in a country, it means that the currency will also rise, which making people in other countries more willing to invest, so of course the exchange rate will rise as well.
- Speculative trading
Of course, in the foreign exchange market, in addition to the participation of banks and non-bank financial institutions in the market, the operations of many professional investors or market speculators will also affect the currency exchange rate. As demand increases and the currency appreciates, the exchange rate will also rise.
In fact, in addition to the above points, there are many factors that will affect the exchange rate changes of various countries, such as the global and regional economies, trade, political stability, and national government debt. For example, the previous US-China trade war , the yield of US Treasury, etc., which all have different degrees of direct or indirect effects on foreign exchange transactions and exchange rates with various currencies. Therefore, financial planning and risk assessment should be done before transactions, and transactions should be conducted reasonably and prudently.
This article shares with you all you need to know about foreign exchange trading. In fact, as long as you master the basics and have your own set of strategies, it's not difficult to make profits through foreign exchange trading!
