The following is a guest post:
The forex market is a market big enough to accommodate your wildest imaginations and your most audacious dreams of making a fortune. The forex market operates on a global scale and the market cannot be readily moved or influenced by any group of people. In case you are still skeptical, it might interest you to know that the forex market records volume trade of more than $4 trillion per day.
Forex traders study hard to learn their craft. More so, they invest valuable time and resources into picking the currency pairs to trade, determining how much they’ll put in a trade, and making a decision how long they’ll stay in the trade. Nonetheless, there’s no denying the fact that the forex market is speculative – but smart forex traders make educated speculations. Forex traders often make educated bets that the value of a currency will be higher or lower than the value of another currency based on evidence from fundamental and technical analysis.
The value of money that change hands in the forex market is more than combined amount of money in online casinos, sports betting, bingo, and poker among other things. However, very few people know that the Forex market has something to offer everybody irrespective of your preferred trading style. This piece seeks to cover two ways through which you can trade currencies in the forex market.
Trading Spot Forex
Trading spot forex is a type of currency trade/exchange that requires the physical exchange of the currency pairs involved in the trade. Many people partake in spot forex trades without being conscious of the fact that they are actually trading forex.
Let’s assume that you are travelling to Europe and you’ll need Euro banknotes for transactions over there. So, you head to your bank with $1000 to be exchanged to Euros – you give the bank $1000 and the bank gives you € 1,100 in return. Let’s assume that you have €100 left when you return to the U.S., so you go back to the bank to exchange the Euros for USD. Now, the dollar strengthened against the Euro, so the bank takes the €100 and gives you $110 in return.
Interestingly, you need not travel outside the country before you can trade spot forex. Many online forex brokers provide a platform for spot forex traders where you can execute trades online or over the phone. Of course, the trades are executed for immediate settlement but the physical delivery of the currencies usually takes about 2 days.
Trading Forex futures
Trading with currency futures is another great way to profit from the forex markets. Trading currency futures is similar to spot forex trading. The only difference the forex trades happen on online platforms such as ETX. More so, the traders rarely take physical delivery of the traded currencies. A currency future trade typically involves a legally binding contract that puts two parties under an obligation to trade a certain amount of currency pair at an agreed price by a given date.
Let’s assume that $1 trades to €1.20 in the market right now, forex future traders could bet that the Euro might weaken against the dollar by the end of next month. Hence, they could place a long trade on the dollar in the hopes that $1 will fetch €1.40 in the next couple of months. If the Euro actually weakens against the dollar, the forex trader will book gains on the spread by selling the contract that obligates him to buy the $1 for €1.20.
If the Euro strengthens against the dollar and the $1 trades for lesser than €1.20, the trader would have lost money on the contract unless there is a reversal in the trend before the settlement date. It should be noted that most of the participants in the forex future markets are speculators and they usually exit their positions before the settlement date.
The aforementioned example is an overly simplified instance of forex futures trading. Online trading has exponentially increased the level of liquidity in the forex future markets and traders will find different sized contracts to trade in the market.