Three Methods For Trading Forex

• The spot market 

  – Because it trades in the largest “underlying” real asset for the forwards and futures markets, forex trading in the spot market has traditionally been the largest. Previously, volumes in forwards and futures markets outpaced those in spot markets. However, with the introduction of electronic trading and the proliferation of forex brokers, trading volumes for forex spot markets increased.

When individuals talk about the forex market, they usually mean the spot market. Forwards and futures markets are more popular with businesses that need to hedge their foreign exchange risks until a certain date in the future.

How The Spot Market Functions

A spot market is a financial market for trading financial instruments and commodities for immediate delivery. The physical exchange of a financial instrument or commodity for a cash transaction is referred to as delivery. Because cash payments are processed promptly and assets are physically exchanged, the spot market is also known as the cash market or physical market.

The spot market is where currencies are purchased and sold depending on their current trading price. That price is established by supply and demand and is computed based on a number of factors, including current interest rates, economic performance, feeling toward ongoing political circumstances (both locally and internationally), and perception of one currency’s future performance against another.

A “spot deal” is a completed transaction. It is a bilateral transaction in which one party provides an agreed-upon amount of one currency to the counterparty and gets an agreed-upon amount of another currency at the agreed-upon exchange rate value. When a position is closed, it is settled in cash. Although the spot market is widely known for dealing with transactions in the now (rather than the future), these trades actually take two days to settle.

• Markets for forwards and futures

  – A forward contract is a private agreement between two parties in the OTC markets to acquire a currency at a future date and at a fixed price. A futures contract is a standardized agreement between two parties to take delivery of a currency at a defined price and date in the future.

Forwards and futures markets, unlike the spot market, do not exchange actual currencies. They instead deal in contracts that indicate claims to a given currency type, a specific price per unit, and a future settlement date.

Contracts in the forwards market are purchased and sold OTC between two parties who agree on the parameters of the transaction. Futures contracts are purchased and sold on public commodities exchanges such as the Chicago Mercantile Exchange based on a defined size and settlement date.

The National Futures Association controls the futures market in the United States. Futures contracts contain particular characteristics such as the quantity of units exchanged, delivery and settlement dates, and minimum price increments that cannot be changed. The exchange functions as the trader’s counterparty, offering clearance and settlement services.

Both forms of contracts are legally binding and are normally resolved for cash at the exchange in issue when they expire, however contracts can be bought and sold before they expire. Currency forwards and futures markets can provide risk protection when trading currencies. These markets are typically used by large international firms to hedge against future currency rate volatility, but speculators also participate.

It’s worth noting that the phrases FX, forex, foreign exchange market, and currency market are frequently used. These concepts are interchangeable and all refer to the FX market.

Terminology In The Foreign Exchange Market

Learning the language of forex is the greatest approach to get started on your forex journey. To help you start, here are a few terms:

Forex Account

The account that you use to trade currencies is known as a forex account. There are three types of FX accounts, depending on the lot size:

• Micro forex accounts are those that allow you to trade up to $1,000 in currency in a single lot.

• Mini forex accounts: These accounts allow you to trade up to $10,000 in currency in a single lot.

• Standard forex accounts: These accounts allow you to trade up to $100,000 in currency in a single lot.

Keep in mind that the trading limit for each lot includes leveraged margin money. This means the broker can give you capital in a set ratio. For example, they might put up $100 for every $1 you put up for trading, requiring you to use only $10 of your own money to exchange $1,000 worth of currencies.

Ask

The lowest price at which you are willing to buy a currency is called an ask. If you put an asking price of $1.3891 for GBP, for example, that value represents the lowest price you are ready to pay for a pound in USD. In most cases, the asking price is more than the bid price.

Bid

The price at which you are willing to sell a currency is referred to as a bid. In a given currency, a market maker is responsible for regularly placing bids in response to buyer inquiries. While bid prices are usually lower than asking prices, they can sometimes be higher than ask prices when demand is high.

Bear Market

A bear market is one in which all currency prices are falling. Bear markets are the outcome of dismal economic fundamentals or catastrophic events such as a financial crisis or a natural disaster, and they indicate a market decline.

Bull Market

A bull market is one in which all currency prices rise. Bull markets are the consequence of positive news about the global economy and indicate a market rise.

Contract For Difference (CFD) 

A financial derivative that allows traders to speculate on currency price movements without actually owning the underlying asset. Traders who believe the price of a currency pair will rise will purchase CFDs for that pair, while those who anticipate the price will fall will sell CFDs for that pair. Due to the use of leverage in forex trading, a CFD trade gone wrong can result in significant losses.

Leverage

The use of borrowed capital to increase profits. High leverages are common in the forex market, and traders frequently employ them to strengthen their positions.

Lot Size

Currencies are exchanged in lots of a certain size. Standard, mini, and micro are the three most prevalent lot sizes. The money is divided into 100,000 units in standard lot sizes. The currency is divided into mini lot sizes of 10,000 units and micro lot sizes of 1,000 units. Traders can also buy nano lot sizes of currencies, which are 100 units of the currency. The lot size chosen has a considerable impact on the overall profit or loss of the trade. The higher the earnings (or losses), the larger the lot size, and vice versa.

Margin

The money set aside in an account for currency trade is known as margin. Even if the trade does not go as planned, margin money ensures the broker that the trader will stay solvent and able to satisfy financial obligations. The amount of margin is determined by the trader’s and customer’s balance over time. For trades in forex markets, margin is utilized in conjunction with leverage.

Pip

Pip (percentage points) are used in the forex market to measure fractional price fluctuations in currency pairs. Almost every currency pair is valued to the tenth decimal place (four digits following the decimal point). Pips are smaller than ticks and reflect the smallest difference between a currency pair’s price reduction or rise. Instead of a specific stock or security, a pip reflects the relationship or “spread” between two currencies.

In currency trading, profits and losses are measured in pip movements relative to the positions that are taken. An investor, for example, would buy dollars using euros in the hopes that the dollar’s value will grow against the euro. If the trader bought dollars at €1.6740 per dollar and sold them at €1.6765, they made a 25-pip profit.

Spread

The difference between the bid (sell) and ask (buy) prices for a currency is known as a spread. Forex traders don’t charge commissions; instead, they profit from spreads. The size of the spread is influenced by many factors. The amount of your trade, the currency’s demand, and its volatility are only a few of them.

Sniping And Hunting

the practice of buying and selling currencies near predefined positions in order to maximize earnings. Brokers engage in this behavior, and the only way to catch them is to network with other traders and look for trends in their behavior.

Final Thoughts

Day trading or swing trading in small quantities in the currency market is easier than in other markets for traders, especially those with minimal capital. Long-term fundamentals-based trading or a carry trade can be successful for those with larger funds and longer time horizons. New forex traders may benefit from an emphasis on understanding the macroeconomic fundamentals that influence currency values, as well as technical analysis knowledge.

We Offer Mentorship Program

If you think you are ready to go to the next level, then this is the right program for you. The Full Mentorship Program includes close supervision and mentorship to maximize your trading skills.

PROFESSIONAL TOOLS 

Practical tools to help you track and improve your trading capabilities.

INSTRUCTOR

A professional trader who will serve as your mentor, personal accompaniment, and a direct communication channel all the way.

TRADING COMMUNITY

Entering a quality community of traders who already know how to make successful trades in the market.

Learn More