Top 3 Methods to Trade Forex
A Forex market is where currency trading takes place. It is the only non-stop or continuous trading market. Before, institutional firms and large banks dominated the forex market in which they represented the clients. It becomes more retail-oriented through the years up to recent. Investors and traders handling different sizes start to participate in the trading market.
There are no physical infrastructures like buildings working as a venue in forex trading markets. Alternatively, it uses a series of connections made by trading terminals and computer networks. Institutions, commercial and investment banks, and retail investors are the participants in this market.
Compared to other financial markets, the forex market is considered more non-transparent. Disclosures are not required in the currencies that are traded on OTC markets. The usual feature of the market is the large liquidity pools coming from institutional firms. It is also common that the most important criterion to determine the currency price is the country’s economic condition, however, it is not the case. It is found in the 2019 survey that the motives of big financial institutions play an important role in determining the prices of currency.
There are 3 methods in trading Forex
- Spot Market
- Forward Market
- Future Market
Spot market trades in the biggest “underlying” real assets for the futures and forwards market. Forex trading in spot markets has always been the largest. In the past, spot market volumes were lower than those in the futures and forwards market. But with the arrival of electronic trading and the rapid increase of forex brokers, trading volumes for forex spot markets increases. The spot market is always referred to when people say forex market. Companies that need to hedge their forex risks favour forwards and futures markets.
Spot Market Process
The spot market is where currency trading (buy and sell) happens based on their trading price. Supply and demand determine the currency price and compute it based on several factors such as current interest rates, sentiment towards the current political situation (local and abroad), economic performance, and the prediction of currency performance against the other.
“Spot deal” is the term used on the finalized deal. It is a bilateral transaction in which one party sends the agreed currency amount to the opposite party and receives a certain amount of the other currency based on the agreed exchange rate value. A cash settlement is received after closing the position. The trades usually take two days for settlement even if the spot market is known as a deal of transaction in the present (instead of the future).
Forwards and Futures Markets
The forward contract refers to a private agreement between two parties to buy a currency at the date in the future and at a fixed price in the over-the-counter markets. A futures contract refers to a standardized agreement between two parties to send a currency at the date in the future and at a fixed price.
Forwards and futures markets do not trade actual currencies rather than deal in contracts that act as claims to a specific type of currency, a certain unit price and a date in the future for settlement.
Contracts are bought and sold over the counter between two parties which determines the agreement terms themselves. Futures contracts are traded on public commodities markets based on the standard size and settlement date.
Forwards and futures contracts are unbreakable and usually settled for cash at the exchange under consideration upon expiry. However, it can also be bought and sold before expiration. Currency in these markets can provide security against risks when trading currencies. Typically, these markets were used by big international corporations to hedge against future exchange rate fluctuation, though speculators can also take part.