The what and how of Foreign Exchange
04 Apr 2023

The what and how of Foreign Exchange

Foreign exchange transaction, in short, is the process of exchanging one cur- rency for another. Such an exchange of supply and demand holds opportuni- ties for investment, but is also accompanied by risks.

Facing such a huge foreign exchange market, what requires our special attention? How to conduct our trading?


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 investment opportunity with relatively low entry barriers.

Similar to stocks or other investment methods, in foreign exchange transaction, investors make profit by buying low and selling high 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.

1. Trading 24 hours a day
The foreign exchange market trades continuously 24 hours per day, 7 days a week. You can seize the moment by making trades any time of the day or night

2. 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

3. 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.

4. 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.


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Risk Disclosure and Important Notice

Foreign exchange involves risks. Customers should note that foreign exchange may incur loss due to the fluctuation of exchange rate.

RMB currently may not be freely convertible and is subject to exchange controls and restrictions. There is no guarantee that RMB will not depreciate. If you convert Hong Kong Dollar or any other currency into RMB so as to invest in a RMB product and subsequently convert the RMB sale proceeds back into Hong Kong Dollar or any other currency, you may suffer a loss if RMB depreciates against Hong Kong Dollar or other currency.