One of the biggest features of foreign exchange margin is that it adopts the margin method, making full use of the leverage principle to achieve a small gain.
Foreign exchange margin trading can be operated in both directions, that is, investors can be bullish or bearish, so the operation is very flexible. The exchange rate of currencies will fluctuate to a certain extent within a day. Based on the principle of two-way operation, investors can not only make profits by buying at low prices and selling at high prices; they can also sell at high prices first and then buy at low prices. And make a profit.
The above two characteristics are very similar to futures trading.
3. 24-hour and T+0 trading mode, which means that foreign exchange margin trading is conducted 24 hours a day (except for global closures on weekends). Moreover, the T+0 model also makes investors’ transactions very casual and convenient. Investors can enter the foreign exchange market for trading at any time, and investors can enter and exit the market at will to change investment strategies. Foreign exchange margin trading has no expiration date, so investors can hold positions indefinitely. Of course, investors must first ensure that there are sufficient funds in their accounts, otherwise they will face the risk of forced liquidation when the funds are insufficient. Investors have a wide range of currencies to choose from when conducting foreign exchange margin transactions, and all convertible currencies can become trading varieties. Assume that there are two investors A and B. They buy 1 million US dollars at the price of Euro:USD = 0.653 through margin method and firm offer method respectively. Since A uses foreign exchange margin trading, its principal requires 6,500 euros (assuming the margin ratio is 1%). B adopts the real trading mode, so it needs 650,000 euros. Since the exchange rate at the time of sale is Euro:USD = 0.648, two investors A and B can make a profit:
A: 100×(0.653-0.648)=5,000 euros
B: 100×(0.653-0.648) = 5000 euros
On the contrary, if the exchange rate when selling becomes Euro:USD = 0.668, then their losses are:
A : 100× (0.668-0.653) = 15,000 euros > 6,500 euros, the loss is 6,500 euros
B: 100× (0.668-0.653) = 15,000 euros
By foreign exchange Comparing margin and real-price trading, it is obvious that foreign exchange margin plays a very good role in leveraging. You can achieve a higher investment rate of return with a smaller amount of investment. Moreover, even if there is a loss in margin trading, the maximum amount of loss is The amount of the security deposit. For contract spot foreign exchange trading, you can either buy at a low price first and then sell after the price rises, or you can sell at a high price first and wait for the price to fall before buying. Forex prices always rise and fall in waves. This method of buying first and selling first not only makes money in rising prices, but also in falling prices. If investors can use this method flexibly, they can benefit from both rising and falling markets. So, how do investors calculate the profits and losses of contract spot foreign exchange trading? There are mainly 3 factors to consider.
First of all, we must consider changes in foreign exchange rates. Investors making money from exchange rate fluctuations can be said to be the main way to obtain profits from contract spot foreign exchange investment. The amount of profit or loss is calculated in points. The so-called points are actually the exchange rate. For example, 1 US dollar is exchanged for 130.25 yen. 130.25 yen can be said to be 13025 points. When the yen falls to 131.25, it falls by 100 points. At this price, each point represents $6.80. Each point of each currency such as Japanese yen, British pound, Swiss franc, etc. represents a different value. In contract and spot foreign exchange trading, the more points you earn, the more profits you will make, and the fewer points you lose, the smaller your losses will be. For example, an investor buys one contract of GBP at a price of 1.6000. When GBP rises to 1.7000, the investor sells the contract, earning 1,000 points of GBP and a profit of up to US$6,250. Another investor bought the pound at 1.7000, and when the pound fell to 1.6900, he immediately sold the contract in his hand. Then, he only lost 100 points, or $625. Of course, the number of points earned and lost is directly proportional to the amount of profit and loss.
Secondly, we must consider interest expenses and income. This article has stated that if you buy high-interest foreign currency first, you will get a certain amount of interest, but if you sell high-interest foreign currency first, you will have to pay a certain amount of interest. If it is a short-term investment, for example, the transaction ends on the same day, or within one or two days, there is no need to consider interest expenses and income, because the interest expenses and income for one or two days are very small, and have little impact on profits or losses. For medium and long-term investors, the interest issue is an important aspect that cannot be ignored. For example, if an investor first sells British pounds at a price of 1.7000, and one month later, the price of British pounds is still at this position, if the interest paid for selling British pounds is 8%, the monthly interest payment will be as high as US$750. This is also a lot of expenditure.
Judging from the investment situation of ordinary residents in 2013, many investors pay more attention to interest income, but at the same time ignore the trend of foreign currencies. Therefore, they like to buy high-interest foreign currencies. As a result, they lose more with less, for example, When the pound fell, investors bought the pound. Even though a contract earned an interest rate of US$450 per month, the pound fell by 500 points in one month, losing US$3,125 in points. The interest income could not make up for the loss caused by the fall of the pound. Therefore, investors should put the trend of foreign exchange rates first, and interest income or expenses second.
Finally, consider the cost of handling fees. Investors buy and sell foreign exchange contracts through financial companies, so investors must calculate this part of the expenditure into the cost. The handling fee charged by financial companies is based on the number of contracts investors buy and sell, not on the amount of profit or loss, so it is a fixed amount.
The above three aspects constitute the calculation method for calculating the profit and loss of contract spot foreign exchange.
The profit and loss calculation formula for Japanese yen and Swiss franc is:
Contract amount*(1/selling price-1/buying price)*number of contracts-handling fee+/- Interest
The profit and loss calculation formula for euros and pounds is:
Contract amount * (selling price - buying price) * number of contracts - handling fee +/- interest
Foreign exchange margin trading, as an investment tool, is legal in Europe, the United States, Japan, Hong Kong, Taiwan and other countries and regions, and traders and trading activities are subject to government supervision. Although foreign exchange margin trading can effectively control the amount of investors' losses, it can also amplify investors' returns, which fully reflects its leverage effect of using small to make big gains. But precisely because of this high leverage, it also carries higher risks. Since participants in margin trading only pay a small percentage of margin, the normal fluctuations in foreign exchange prices are amplified several times or even dozens of times. The gains and losses brought about by this high risk are staggering. However, many investors are blindly blinded by its high profitability, ignore the nature of margin trading that also increases risks, and blindly pursue speculative profits. Margin trading is a relatively new investment product in China. Even in more developed countries, foreign exchange margin business is generally considered to be a highly speculative and high-risk product.
Secondly, in the foreign exchange market, changes in the economic policies of various countries will lead to frequent and large fluctuations in currency exchange rates, and foreign exchange margin trading usually involves the fluctuation of multiple currencies, so this business is limited to a certain extent. Increased requirements for investors’ own quality. According to a survey by the China Banking Regulatory Commission, although domestic banks can make a profit by launching this business, the proportion of ordinary investors participating in this business suffers a high loss. Currently, 80% or even 90% of investors are losing money.
At the same time, some banks are suspected of certain illegal operations when providing this new type of product and service. In general developed financial markets, the leverage ratio of foreign exchange margin trading is maintained at around 10 to 20. However, it is understood that the leverage ratio of some domestic banks actually reaches 30-50 times, which is far beyond what is generally achieved internationally. The leverage multiple accepted also exceeds the bank's own risk management and control capabilities. In addition, in order to expand customers, some banks have also lowered the customer entry threshold without authorization, failing to effectively select customers or recommend suitable products to customers. Eventually, the entire foreign exchange margin business experienced high losses and low profits.
Based on the above, in order to protect the interests of investors and promote the steady development and risk control of banks, the China Banking Regulatory Commission issued a document officially suspending the foreign exchange margin trading business. The standard accounts of mainstream foreign exchange brokers generally use a high leverage ratio of 100:1. That is to say, if the account is fully operated and the reverse fluctuation reaches 1%, it will cause a liquidation. Therefore, it is difficult to know how to avoid the risk of high leverage ratio. seems very important. To avoid risks, you must first understand the risks. A high leverage ratio is actually a double-edged sword. If you use it well, you can be invincible. If you use it poorly, it can only hurt others and yourself. The so-called different leverage ratios actually just stipulate different maximum positions for your account. Once you realize this essence, you will know how to deal with it. You can adjust the leverage ratio by controlling the maximum position size yourself. For example, under a leverage ratio of 100:1, your account funds allow you to hold a full position of 50 lots. At this time, if you control the maximum position size to never exceed 5 lots, your real leverage ratio will drop to 10:1. According to statistics, the actual leverage ratio of accounts that can maintain profitability is generally controlled between 4:1 and 20:1. Therefore, if you strictly control your leverage ratio within this range, you can control your risk to a large extent. To ensure high returns with low risk.