The Different Types of Forex Trading

As the Forex market (FX) is so fabulous, it has allowed Forex traders to discover numerous different ways to invest in Forex trading.

May 20, 2022 - 11:41 AM 542 views

The Different Types of Forex Trading

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As the Forex market (FX) is so fabulous, it has allowed Forex traders to discover numerous different ways to invest in Forex trading.

The most popular ways to trade in the Forex market are:

  • Retail Forex
  • Spot FX
  • Currency Futures
  • Currency Options
  • Currency traded Exchange Funds
  • Forex CFDs
  • Forex Spread Betting

In this article, we are covering the different ways in which an individual trader can trade in the Forex market (FX).

Because they cater to institutional traders, FX swaps and forwards are not covered in this article.

Besides, in the current article we will discuss the different methods to trade in the FX market.


Currency Futures

Futures are agreements to buy or sell a particular asset at a specified price on a future date.

A currency future is similar to a futures contract in that an agreement is made that specifies the price at which currency can be purchased or sold and specifies a specific date for the exchange.

The Chicago Mercantile Exchange (CME) was created for currency futures in the year 1972. Moreover, in currency futures, the future agreements are standardized and traded on a centralized exchange. Hence, the market is transparent and well-regulated. This means the cost and the transaction data are instantly available.

Currency Options

An option is a financial tool that provides the buyer the right or the option, but not the obligation, to purchase or sell an asset at a specified cost on the option’s expiry date.

A trader who "sells" an option is obligated to buy or sell an asset at a certain price on the expiration date.

Options are traded on exchanges including the Chicago Mercantile Exchange (CME), the International Securities Exchange (ISE), and the Philadelphia Stock Exchange, just like futures (PHLX).

The downside of trading FX options is that market hours are limited for some options, and liquidity is not as high as it is in the futures or spot markets.

Currency ETFs

A currency ETF is a fund that invests in a single currency or a basket of currencies.

Currency ETFs are managed funds that allow ordinary people to obtain exposure to the forex market without having to do individual trades.

Currency exchange-traded funds (ETFs) can be used to speculate on foreign exchange, diversify a portfolio, or hedge against currency risks.

The most widely traded currency ETFs are listed below.

Financial institutions that buy and hold currencies in a fund construct and manage ETFs. They then sell shares of the fund to the general public on an exchange, where you can purchase and sell them much like stocks.

Trading currency ETFs has the same drawback as trading currency options: the market isn't open 24 hours. Trading commissions and other transaction costs apply to ETFs as well.

Spot Market 

The Spot Market, which is also called the Over-the-Counter (OTC) market or Off-exchange market,

This off-exchange market, or spot market, is a big one, growing and the most liquid financial market that operates for 24 hours continuously (non-stop) and doesn’t have any physical location. However, in an OTC market, a trader trades directly with the counter-party.

In contrast to the centralized markets that trade currency futures, ETFs, and (most) currency options, But, in the spot markets or the over-the-counter markets, contracts or agreements are made between the two parties.

The majority of Forex trading occurs through electronic media (i.e., via internet technology).

The “Interdealer” market is the primary FX market where Forex traders trade with each other. A dealer is a financial middleman who can purchase or sell currencies with its clients at any time.

Due to banks' dominance as FX dealers, the interdealer market is sometimes known as the "interbank" market.

Institutions that trade in significant volumes and have a high net worth can access the interdealer market.

Banks, insurance companies, pension funds, major corporations, and other significant financial organisations are among those that manage the risks associated with currency rate swings.

An institutional trader buys and sells an agreement or contract to make or take delivery of a currency in the spot FX market.

A bilateral ("between two parties") arrangement to physically swap one currency for another is known as a spot FX transaction.

This is a legally binding agreement. This means that this spot contract is a legally enforceable agreement to buy or sell a certain amount of foreign currency at the current "spot exchange rate."

So, if you buy EUR/USD on the spot market, you're trading a contract that says you'll get a certain amount of euros in return for US dollars at a set price (or exchange rate).

It's vital to note that you're trading a contract involving the underlying currencies, not the underlying currencies themselves.

Even though the term "spot" is used, transactions are not always concluded "on the spot."

While a spot FX trade is executed at the current market rate, the transaction is not completed until two business days after the trade date.

T+2 stands for "today plus two business days."

The value date, also known as the delivery date, refers to the delivery of what you buy or sell within two working days.

In the spot FX market, for example, an institution buys EUR/USD.

The trade began on Monday and ended on Wednesday, with a value date of Wednesday. This implies

Retail Forex Market

A secondary OTC market exists that allows retail ("poor") traders to participate in the FX market.

So-called "forex trading providers" provide access.

On your behalf, forex trading services trade in the primary OTC market. They locate the best available prices and apply a "markup" before posting them on their trading platforms.

This works similarly to how a retail store purchases products from a wholesale market, adds a markup, and displays a "retail" price to customers.

However a spot forex agreement typically requires currency delivery within two days, no one in forex trading actually takes delivery of any currency.

On the delivery date, the position is "rolled" forward, especially in the currency retail market.

Keep in mind that you're trading a contract to deliver the underlying currency, not the currency itself.

It's a leveraged contract, not just a contract.

On leveraged spot forex contracts, retail forex traders cannot "take or make delivery."

Leverage allows the user to control enormous sums of money with a modest investment.

Because retail forex brokers allow you to trade with leverage, you can open positions worth 50 times the original needed margin.

So, with $2,000, you may open a $100,000 EUR/USD trade.

Imagine being short on EUR/USD and having to provide $100,000 in euros!

Because you only have $2,000 in your account, you won't be able to settle the deal in cash. You'd be unable to complete the transaction due to a lack of funds!

As a result, you must either close the trade before it settles or "roll" it over.

Retail forex brokers automatically "roll" client positions to avoid the inconvenience of physical delivery.

Tomorrow-Following or "Tom-Next," which stands for "tomorrow and the next day," is the technique for rolling the currency pair over.

When a trader's positions are rolled over, he or she will either pay or earn interest.

Swap or rollover fees are the terms for these expenses. Your forex broker calculates the fee and debits or credits your account amount accordingly.

Retail forex trading is regarded as high-risk. This indicates traders are attempting to "speculate" or wager on the movement of currency rates in order to profit. They have no intention of taking physical custody of the currency they purchase or selling.

Forex Spread Bet

Spread betting is a derivative product, which means you don't own the underlying asset and instead speculate on whether its price will rise or fall in the future.

A forex spread bet allows you to speculate on a currency pair's future price direction.

The spread bet price for a currency pair is "derived" from the spot FX market price for that currency pair.

How far the market moves in your favour before you close your position and how much money you stake every "point" of price movement determine your profit or loss.

"Spread betting providers" provide currency spread betting services.

Spread betting is, unfortunately, prohibited in the United States. Despite being authorized by the Financial Services Authority in the United Kingdom, spread betting is currently illegal in the United States.

Forex CFD

A financial derivative is a contract for difference (CFD). Traders can wager on whether the price of an underlying asset will rise or decline by using derivative products that track the market price.

A CFD's price is "derived" from the price of the underlying asset.

A CFD is an agreement in which one party agrees to pay the other the difference in the value of a security between the opening and closure of a trade, often between a CFD provider and a trader.

To put it another way, a CFD is essentially a bet with the CFD provider on a certain asset's value rising or falling, and you agree that whomever wins the bet will pay the other the difference between the asset's price when you enter the trade and its price when you exit the transaction.

A forex CFD is a contract in which you agree to swap the difference in the price of a currency pair between when you open and when you end your position.

The CFD price of a currency pair is "derived" from the currency pair's spot FX price. (At least, that's how it should be.) If not, on what is the CFD provider's price based?)

When you trade forex CFDs, you can trade a currency pair in both directions. Both long and short positions are available.

You will profit if the price moves in your chosen direction, and you will lose if it moves against you.

Regulators in the EU and the UK ruled that "rolling spot FX contracts" are distinct from "standard spot FX contracts."

The major reason for this is that rolling spot FX contracts have no intention of ever taking physical delivery ("taking possession") of a currency; instead, their sole purpose is to speculate on the underlying currency's price movement.

The goal of trading a rolling spot FX contract is to obtain exposure to the underlying currency pair's price swings without actually owning it.

A rolling spot FX contract is ruled as a CFD to make this distinction evident. (Because CFDs are banned in the United States, this is referred to as a "retail forex transaction.")

"CFD providers" provide forex CFD trading.

CFDs or spread bets are commonly used in retail forex trading outside of the United States.

Read More Article:

How to invest in Foreign Exchange Market (FX) Step by step in 2022

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In Detail, What Is The Forex Market (FX)?

What is the Best Way to Make Money Trading Forex?

In the Forex Market, What is actually traded?

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Currency Pairs: Buying and Selling

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