Traders have a number of options for trading Forex, the most popular of which include forex spot trading, futures contracts and options contracts.
Of this list, sport currency trading is the most popular and has the largest trading volume and as discussed, this means it is the most liquid and so has the tightest spreads and reduced chances of slippage. Here, traders are trading on the underlying real asset price, the price that the futures contracts are based upon. The ‘spot’ price is the current market price and has a number of determinants that traders should be aware of and study prior to engaging in trading. This information is readily available with many brokers, something you should factor into your decision when choosing a broker. Also note that despite spot deals being carried out in the present, the actual transaction takes two days to complete.
A forex futures contract is an exchange traded contract to buy or sell an agreed amount of a currency pair at a predetermined price on a specified date. The average contract length is 3 months and these contracts are generally inclusive of any interest amounts.
Forward contracts are similar to futures contracts. Both are traded with the view to allowing traders to purchase or sell a specified amount, for a predetermined price on an agreed date, but there are subtle differences:
The nature of the agreement differs in that futures contracts are exchange-traded and are, therefore, standardised contracts, while forward contracts are private agreements resulting in being somewhat more flexible in their terms and conditions. It is for this reason that forward contracts carry a higher risk of default than futures contracts which are strictly regulated by an agency or separate corporation of a futures exchange. Also, futures contracts can have a range of settlement dates but forward contracts only have one. Futures contracts are, in the main, traded by ‘speculators’ who may wish to close out a profit prior to the maturity date while those engaging in forward contracts are often those looking to hedge against the volatility of a currency pair and so the contract will remain open until the settlement date.
The buyer of an options contract has the right, but not the obligation, to purchase or sell an asset at a specified price by a predetermined expiration date. So, these are similar to futures contracts where traders are agreeing to buy or sell an asset, but with options contracts you would be paying a fee for the option to decide in the future whether you want go ahead with the purchase or sale. This fee that trader ‘A’ pays goes to the other party in the contract, trader ‘B’, and acts as a deposit for trader ‘A’ and as compensation for trader ‘B’ should the price of the asset change in favour of trader ‘A’. The main drawbacks of trading forex through using an options contract are the relative lack of liquidity and the trading hours.
Traders need to know what to look for when choosing a Forex broker as the services offered by this broker can affect the how you trade. The vast majority of those who trade Forex lose money because they underestimate how difficult it is and go in with a simplistic view and without having done their ‘homework’. If it was that easy, everybody would be doing it, but it’s not and they don’t. Furthermore, fundamental analysis can only take you so far, but the Forex market is one of the most technical that you can use for trading and so you should look to technical analysis to assist you in your decision making. Utilise the charting tools offered by your Forex broker of choice, sign up for webinars and training courses and make sure you are completely ready. There is definitely money to be made trading Forex but you have to work for it. Keep an eye out for long term trends and market sentiment as they can all impact on prices and you will need to be ready to act and react quickly and accurately in a dynamic market. On top of this, prior to opening a trade every trader should be aware of how they wish to carry out the trade, how long they wish the position to be open and also the determinants of forex rates.