1.4 Types of Forex Trading

The four most common routes to trade Forex are via the spot market, futures, options and ETFs (Exchange Traded Funds). Please nothe that these types of trading is not only limited to Forex markets but used for various other markets also. Let's check what these are:

 

Spot Market

As the name suggests, it's trading on the stop i.e. immediate buying at selling. The main features of Spot Market are as follows:spots markets - immediate trading

  • Round the clock.
  • Immediate execution.
  • Highly liquid.
  • Fine spreads i.e. less difference in bid and ask prices.
  • For retail traders and hence trading is possible with very small amounts.
  • Retail brokers offer freebies like charts and news to help retail traders.
  • This is where you’ll apply what’s in this book.

 

Futures Trading

Picture showing Futures marketsAs the name says, in Futures markets any contracts for buying or selling takes place at a future date. While entering into a buying or selling contract, we specify a future date and also a price to close the deal on that day. Futures markets are used by both basic types of traders i.e. hedgers and speculators. Hedgers use future markets to protect against some unexpected and adverse price movement and speculators use these to make profit if the markets move as per their analysis.

 

Main features of Futures markets are as follows: 

 

  • Trade in standard contracts that would be settled at a ‘future’ date
  • Available only on exchanges
  • Well-regulated and very transparent
  • Limited by exchange timings
  •  

Options Trading

Just like the Futures, Options also have a future date and a specified price for the asset involved. The difference isOption trading has an expiry date that the future date is an expiry date and the trading is supposed to be completed by the expiry date. The second difference is that the buyer has the option to buy but not the obligation. The same is not true for the short-seller because if you have short-sold something without owning that, then you are obliged to buy it, by the expiry date.

 

The buyer pays a small price and have a contract that he may buy the asset (in our case a currency) at a certain price by the expiry date. During that time the price of that asset may go higher than the contracted price and if that happens they buyer makes a profit by buying. On the other hand the price may fall drastically and in such case the buyer may opt for not buying. If he or she does not buy then the initial deposit is lost.

 

The main features of Options trading are as follows:

 

  • An option contract offers the buyer the right, but not the obligation, to buy or sell a financial asset at an agreed-upon price by a specific date.
  • Options, too are exchange traded.
  • Limited by exchange timings.
  • Liquidity much lower than the spot or futures market.
  •  

Exchange Traded Funds (ETF)

Exchange traded funds basketExchange Traded Funds or ETF hold some assets and are traded like a stock on stock exchanges. The price of ETF stocks follow the prices of the underlying assets. In case of Forex market, the underlying assets could be a single currency, a basket of currencies or even a combination of currencies with other financial instruments e.g. stock.

 

The main features of ETF are as follows:

 

  • Fund managers buy and hold currencies in a fund.
  • Units of that fund are then sold to the public
  • These units are listed on an exchange and traded like a stock
  • Investors use these to hedge their exposure in stocks
  • Markets are not open 24 hours as these are traded like stocks

 

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