If you want to earn a vast amount of profit in a short span of time taking a high risk then forex trading is the perfect choice for you. Although there are several types of forex trading but the The most popular Types Of Forex Trading are
- Spot fx
- Trading currency futures
- Retail fx
- Currency options or forex options
- ETF or currency exchange-traded funds
- Forex CFD
- Forex spread betting
In this article, I will cover different types of forex trading and how as an individual trader you can take advantage of it.
Types of forex trading
A spot forex trading is an agreement. This type of agreement occurs between two groups who objectively exchange one currency against another currency.
There are many beneficial factors in the spot fx market. The spot foreign exchange market is open 24 hours a trading day and 5 days a week. So except Saturday and Sunday, you can trade here any time period in the whole week.
This is an over-the-counter (OTC) currency market.so here you can trade directly with a counterparty. As the spot fx market is the most liquid and large Market, so you don’t need to wait for any buyer to sell your currency. Always buyers are ready to buy from you.
Unlike traditional business concepts, there is no physical body or central location here.
Here, in spot fx, day traders trade through electronic trading networks. Brokerage houses play a vital role in this market. Dealers or brokerage houses trade with each other for their customers. Sometimes big central banks heavily get involved in the spot fx market. That’s why this largest market is also called the interbank market.
I am giving here an example to make it more clear. Suppose if you buy GBP/USD on the spot fx market, you are basically trading a contract or agreement. This means you are buying or receiving a specific amount of pounds exchanging US dollars. You have to pay US Dollars to get the British pound.
The fun fact is that although we name it “Spot fx” but the transactions or dealings aren’t settled on the spot or instantly.
Rather the actual transaction is made or settled two days later. More precisely, if you long or short a currency pair Monday, it will be handed over Wednesday. This delivery date is called the value date. In this example, if your buy position on GBP/USD opened Monday, then the value date of this position will be Wednesday.
Although all the currencies have not had the same value date. like USD/CAD, USD/TRY, USD/RUB takes one business date to be valued.
Trading Currency futures
Currency futures are futures contracts based on exchange trading. If you buy or sell any foreign currency against another on a future date that is called futures contracts trading.
Chicago mercantile exchange first created currency futures in 1972. And from 1972 till today Chicago mercantile exchange is the largest and most popular market for trading currency futures in the world.
Retail traders trade on the currency futures market mainly for two reasons.
1/ Professional traders try to hedge other trades
2/ Active traders try to make a profit by speculating on price movement.
It is observed that mainly investors intended to speculate trade this market. These speculators do not wait till their contracts reach an expiry date. These speculators enter and exit the market promptly. After a short movement in the market, they exit with gain or make a loss.
In trading currency futures, market participants have to have sufficient capital in their trading account. With this sufficient capital traders cover their margins. Currency futures are objectively delivered in December, September, June, and March. The only exception is Mexican peso and South African Rand-related contracts.
If I give you an example, then the whole thing will be more clear. For say, Walmart is a US-based company. This Walmart company wants to hedge its projected 125 million euros in March. Wallmart company is a USA based company, so they don’t need euros. For that very reason before March Walmart company could short futures contracts on euros.
Wallmart company knows they will receive euros. Now Walmart sells them and fixes them at a rate at which those euros can be exchanged for US dollars. Walmart sells 5000 futures contracts.
If the euro depreciates next March against the US dollar, then the company’s projected receipt will be protected. But if the euro appreciates then they can’t demand the profit they made at that future time.
Trading currency futures vs trading forex
1/ Financial markets are the largest and most liquid market in the world while currency futures trade at a fraction of the trading volume.
2/In forex trading brokers offer the high leverage. As a result, currency traders can make a huge profit or huge losses with small amounts of money. Currency futures can be traded under low and modest leverage.
3/currency futures are regulated markets like other markets, while forex has less regulation.
4/in currency futures there is a centralized body while the forex market is a decentralized market.
5/In forex trading short-term trader don’t need to pay commissions and some other fees. Spreads are the only cost they pay for trading. In the currency futures market traders need to pay commissions and other various exchange fees to their brokerage house.
Many poor forex traders want to trade on forex. You can trade by taking high leverage with the help of retail forex brokers. If you are also a poor position trader then, here brokers allow you to open any position valued 100 times the amount of the required margin.
Let me give you an example here .you analyze the market and figure out that the value of the euro will depreciate and the US dollar will be strong soon. So you want to open a $100,000 valued trade on EUR/USD pairs. As you are guessing the euro will weaken, so you short this pair.
But assume you have only $2,000 in your account. with this little amount of money, you can’t open this position because if you want to open a short position on EUR/USD, then you have to deliver $100,000 worth of euros.
As you have only $2000 in your account, you would not be able to set the contract in cash. So you have to roll it over. Retail forex brokers help their clients by rolling their positions automatically. This transaction is called a “retail forex transaction” or “rolling spot fx contract.”
Your broker opens an opposite and equal position against your position. And in this way, they close out the transactions.
For example, if you bought Canadian dollars against the Japanese yen, you may close out the trade by selling Canadian dollars against the Japanese yen. This action is called the liquidating transaction.
We discussed the CAD/JPY pair above. If you buy CAD/JPY and you don’t close your position till business day close then your broker keeps on rolling over your opened CAD/JPY contract. And this rolling event will continue day after day until you manually give close order of your opened position. And this rolling over event keep you safe from the currency delivery event.
When your retail broker rolls over your contract then either you have to pay interest, or you will get the interest for holding the position. And this interest is called the swap fee.
You may hear about speculation many times. When you don’t look to take physical possession of the currencies rather your only interest is made bets on the movement of an exchange rate that is speculation. Most of the time retail fx swing traders are speculators. Retail fx brokers give them to speculate the market and make a living.
Currency options or forex options
An fx option is basically a contract. This contract means the buyer owns the right to buy or sell a particular currency on a specified exchange rate before a specified date.
When big corporations, individuals, and financial institutions wish to avoid rough movements in the market, they try to hedge. And for hedging, currency options are the best choice for them.
If you read carefully about currency futures, then you noticed that currency futures are traded on the exchange. Currency options are also traded on an exchange house. Several exchanges like Chicago Mercantile Exchange (CME), Philadelphia Stock Exchange allow trading currency options.
If you are very keen to trade currency options, you need to understand that the liquidity there is not as big as spot fx or currency futures market. You will also have to face problems trading randomly as market hours are limited for some specific fx options.
There are two types of currency options.
There are two types of vanilla options. Call options and put options.
Call options give the holder the right to buy an underlying asset at a strike price. In the stock market, If the stock fails to meet the strike price before the validity period, the option becomes worthless. As an investor, you should buy calls when you analyze the market and get that the price of that particular stock will rise. Similarly, you should sell a call if you find the price of that particular stock will fall.
A put option gives the holder the right to sell a stock at the strike price. The seller here is bound to buy the stock at the strike price.
The full form of spot option is single payment options trading. The cost here in the spot option is higher compared to traditional options. The only advantage investors get here in spot options trading is trade execution is super easy.
ETF or currency exchange-traded funds
When financial institutions buy and hold currencies in a fund called currency exchange-traded funds or ETF. In the first step, these big institutions create ETFs; then they publicly open shares of the fund on an exchange…it allows you to buy and trade these shares. If you have experience trading stocks, you can easily trade ETFs as trading ETFs are just like trading stocks.
If you compare ETFs with retail fx or spot forex, then the disadvantage you will find here is that the market isn’t open 24 hours a day. Another big disadvantage is that you won’t need to pay any extra commissions or charges except swaps in the spot forex or retail fx market. But in the ETFs market, you need to pay commissions and many extra charges.
Many speculators use currency ETFs to speculate on the forex and make a handsome living. Also if you want to diversify your portfolio or lessen your currency risks through hedging then the ETFs market is the perfect market for you.
The full form of CFD is a contract for differences. This is an advanced trading method. Only experienced traders use this forex trading strategy. The fun fact about CFD is many countries, including the United States of America, don’t allow CFD trading.
CFDs basically allow traders or speculators to trade the direction of securities. Speculators trade CFDs for a concise period of time. These speculators bet based on price movements. When a speculator expects the price to rise or an upward movement, they buy the CFD. Similarly, when a speculator or CFD trader expects the price to fall or downward movement in price, the speculator will sell the CFD.
Sometimes many traders, even experts, get confused about futures contracts and CFDs. CFD traders can trade CFDs based on future price movements, but CFDs are not future contracts themselves.
The main benefit of trading CFD is that CFDs give speculators all the benefits of owning a security without having a physical asset. If you are a CFD trader, then you can trade on margin or borrowed money. Many brokers allow traders to borrow money from them and increase their leverage. In this way, you can amplify your trading position’s size and make huge profits with a small amount of money.
Forex spread betting
Speculators like spread betting much. It allows you to speculate on future price movements. No matter in which direction the price will go in the future. You just need to guess the up move and down move of the price and bet on it. If your guess works and the price goes in your direction, you will make a profit, and if not, then the loss is the outcome.
Forex spread betting is actually a derivative product. In fx spread betting, you won’t need to take ownership of the underlying asset. All you need to do is speculate on the direction of the market.
The question is, how much profit can you make by guessing the market. Your profit or loss will depend on how deep the market goes on your side before closing your position. one more thing you need to discuss is how much money you put on the table is also a criterion of how much gain or loss you make. If you bet a bulk amount on per “POINT” price movement, you will get a huge profit. But the chance of making a huge loss also lies here.
If you are a resident of the United States of America, you won’t be able to spread bet. As spread betting is illegal in the USA. The question is, does the US government make it illegal? The US government thinks spread betting is international online gambling, so they forbid this trading for their country’s people. The fun fact is that although FSA and U.K give regulations to spread betting, these regulations can’t be enough to make it legal for us people.
A common question peep in newbies is why the forex market is the most liquid and largest globally. The reason is the modern age with easy internet access. Now the whole world becomes a global village of trade, commerce, finance, and technology.
So in the modern era, fx becomes the marketplace for exchanging different national major currencies against each other. Now currency pairs like EUR/USD, GBP/USD can be traded globally with one click of a finger. All you need is to have an internet connection, a personal computer, and a little amount of money in your trading account.
But if you want to become successful in forex trading and make a handsome amount for your living, proper knowledge of trading is a must. I tried to cover all types Of Forex Trading here. Still, if you have any queries comment here to discuss with me.
Legendary trader’s opinion about types of forex trading
” The difference between spot fx and currency futures options is subtle but worth noting”Matt Lee