Forex exchange is an international market for trading currencies. According to a survey by the Bank for International Settlements in 2016, the average daily forex trading was 5.1$ trillion and of this, spot trading made up $2.6Traders have trillion. This article will outline are 3 ways to trade forex:
Currencies are bought and sold immediately or on the spot at the current or the prevailing market prices which are determined by the forces of supply and demand. There are several factors that affect the demand and supply of currencies such as the prevailing political temperatures both locally and internationally, interest rates, economic performance and the expected performance of a particular currency against another for example EUR against USD. A finalized transaction of the currency exchange is known as a “spot deal”. This is a bilateral deal whereby one party delivers the agreed amount of currency to another, and in turn, receives the corresponding amount in the counter currency based on the agreed terms or the agreed exchange rates and the positions are closed with cash settlements. The cash settlement can, however, take up to two days. This market has a number of advantages which include simplicity, liquidity, tight spreads and round-the-clock or the 24/7 operations. It’s very easy to trade in this market because accounts can be opened with as little as $50. The stockbrokers in this market usually provide charts, news, and research for free.
Futures are contracts or agreements to trade or to buy or sell a certain asset at a specified price on a future date. A futures contract is traded on standard sizes and settlement dates and the transactions are regulated by the National Futures Association. Futures are traded on a centralized exchange and thus are very transparent and well-regulated meaning the price and the transaction information are readily available to traders. The contracts in a futures market contain specific details like the number of the traded units, settlement and delivery dates and the fixed minimum price increments. The exchange serves as the trader’s counterpart that provides clearance and settlement of the contracts. The contract is binding and positions are closed with cash settlements which are marked-to-market daily meaning that daily changes are settled on a daily basis until the contract ends. The contract can be closed out prior to maturity. This contract provides a hedge against fluctuations of the currency exchange rates in the future. Large futures markets operate clearinghouses, for example, Chicago mercantile exchange, New York Mercantile Exchange, Eurex etc that guarantee the transactions and lowers the possibility of default by the parties involved.
Forward is a customized contract or a private agreement between two parties to buy or sell an asset at a specified price on a future date. All the terms of trade are dictated by the parties that enter the contract. The contract is binding and positions are closed with cash settlements upon maturity or on the expiration dates usually at the end of the contract. This contract is used as a risk protection in currency trading and is also used as a hedge against fluctuations in future currency exchange rates. This market is however exposed to counterparty risk that occurs if one party fails to honor the agreement or defaults. Forwards don’t trade on a centralized exchange and are therefore deemed as over-the-counter (OTC) instruments.
Traders can also explore other markets such as the options and the currency ETFs.