Discussion Topic: Ways to Trade Forex
In this lesson, you would learn about four different ways to trade forex or currencies. They are also the most popular ways for investing in the forex market. You will learn the overall concept of Spot Forex, Currency Futures, Forex Options, and Currency ETF’s. So, let’s jump to the lesson without farther waiting.
Assuming, you already know what the Forex trading is and how much liquidity it has. So it is obvious that most of us would be very excited to participate in the Forex trading.
So, it is worth to know that there are majorly four different ways to invest in the Forex market for trading currencies. Those are as follows:
Spot Forex Market or Spot Currency Market
The spot Forex market or currency market is the most common way to trade currencies. In the spot market, currencies are traded in real time or “on the spot,” using the live market price.
The advantage of this market is simplicity, liquidity, tight spreads, higher leverage, and around-the-clock operations.
It is very easy to take part in this market as accounts can be opened with as low as $50! (*Though it’s not suggested to open with such a low amount). Apart from that, most Forex brokers typically provide charts, news, and research free of charge.
[See Also: Top 10 Advantages of Forex trading.]
The major disadvantage of this spot market is that it's not a well-regulated market. Hence the trader should be extra cautious and conservative while choosing a Forex broker.
[See Also: Top 10 Disadvantages of Forex Trading.]
In FinanceOrigin Forex Trading Lessons, we will be primarily talking about the Spot Forex market.
Currency futures were first set up in 1972 by the Chicago Mercantile Exchange (CME) after the United States decided to allow world currency exchange rates to float. It is very similar as to the spot market, but with some key differences.
In currency future trading, traders actually buy and sell standardized contracts with a predefined expiration date.
For example, the standard contract size (Standard Lot) for the EUR/USD is $100,000. These standardized contracts are traded with fixed expiration dates on a quarterly cycle.
[See Also: What is a Lot? How to Calculate Lot value?]
One of the greatest differences between the spot and futures market is that in the futures market everyone gets the exact same quotes. It does not matter if the trader is a retail trader at home or a trader at a multinational bank; price is same for everyone.
Another difference is that futures brokers charge commissions above the exchange and clearing fees, whereas spot market operates on bid/ask spread.
[See Also: Understanding the Bid/Ask Spread]
In Currency futures contracts are cleared by central exchanges, which eliminate counterparty risk.
Currency Options or Forex Options Trading
An “Option” or “Option Contract” is a negotiable instrument (or financial instrument) that gives the buyer the right or the option, but not the obligation, to buy or sell an asset at a specified price on the specific option’s expiration date.
On the other hand, If a trader “sold” an option, then he or she would be obligated (bound) to buy or sell an asset at a specific price at the option’s expiration date.
Forex Options are also listed and cleared centrally through Currency Exchanges. But unlike Future contracts, here at Options contract, the option buyer has the control on the Risk factor of price movement.
The advantage is that, for buying options contract, you have to pay a premium amount only and if the deal gets wrong the maximum amount you can lose is the paid premium amount.
However, the disadvantage of trading Forex options is that the market hours are limited to certain options and the liquidity is not as high as the futures or spot market.
A very well-known form of Currency Options is Binary Options, which has gain popularity in recent days because of the rigorous utilization of mobile platforms.
Currency Exchange Traded Funds (Currency ETFs)
Currency ETF’s are the newest member of Forex trading family.
Currency ETF’s are traded in the same way as the Stocks ETF’s. It is a financial instrument that holds an asset value and trades in relation to its underlying assets.
ETFs are offered and managed by financial institutions who buy and hold currencies in a fund. They then offer shares of the monetary fund to the public, allowing you to buy and trade those shares just like stocks.
The rules for trading Currency ETFs are similar to that of trading stocks. And this type of fund is more popular among those investing for medium or long-term.
Like currency options, the limitations of trading currency ETFs are that the market isn’t open round-the-clock. Also, ETFs are having moderate trading commissions and other transaction costs.
Here is a list of very convenient and most popular Currency ETF’s for your reference.
We hope that you have enjoyed the above article on Four different ways you can start trading Forex. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions about Spot Forex, Currey Futures, Currency Options, and Currency ETFs. Also, share your experience of trading in those type of funds, if you like to.