How To Trade Currencies In Various ways?

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orex’s incredible features make traders think of various ways of speculating in currencies all the time. Be ready to fully dive in the waters of trading! This is an important lesson that you need to read until its very end.

Let’s start with the financial instruments that will help you do that. The most popular and used ones are retail forex, spot FX, currency futures, currency options, currency exchange-traded funds (or ETFs), forex CFDs, and forex spread betting.

The spot forex market can be divided into three sections: Retail forex market, CFDs, and spread betting.

You are a retailer (individual) trader, so we will cover only the contacts that apply for your trading. That’s why we won’t be explaining the forward market, which is for institutional traders.

Currency Futures market

Future forex market: a contract is agreed to buy or sell a set amount of a given currency at a set price and date in the future. Unlike forwards, a futures contract is legally binding.

After the establishment of the fixed exchange rates and the gold standard, the currency futures were created by the Chicago Mercantile Exchange (CME) back in 1972.

They are traded in terms of contract months with standard maturity dates typically falling on the third Wednesday of March, June, September etc.

Since futures contracts are standardized and traded on a centralized exchange, the market is very transparent and well-regulated.

Currency Options

Options are contracts that can be purchased by paying an amount called the “premium” for the right, but not the obligation, to buy or sell the underlying instrument or asset at a specified price on a specified date.

The buy option is called “call”, the sell option is “put”. So, if you bought an option, you would choose a price level at which you would like to have a position in the underlying instrument, on a certain date ahead of time.

These contracts increase or decrease based on the prevailing price level of the underlying instrument relative to the strike price.

Options are also traded on an exchange, such as the Chicago Mercantile Exchange (CME), the International Securities Exchange (ISE), or the Philadelphia Stock Exchange (PHLX).

Like anything in the world there is a disadvantage coming along with the advantage of trading FX options. Market hours are limited for certain options and the liquidity is not nearly as great as the futures or spot market.

Spot FX

Spot forex market is the physical exchange of a currency pair, which takes place at the exact point the trade is settled – ie ‘on the spot’ – or within a short period of time.

Most traders speculating on forex prices will not plan to take delivery of the currency itself; instead they make exchange rate predictions to take advantage of price movements in the market.

Like we already know the spot market is an OTC market, which doesn’t have a centralised location and operates 24 hours a day.

A trader receives price offers from his broker, who in turn receives them from a liquidity provider or set of such and each is connected in a large strong market at the same time, trading Forex online.

Prices are determined by two increasingly competitive forces: demand and supply. When there is oversupply, the price of an asset goes down. When there is excess demand, the price goes up. The more people buy – the higher the price and vice versa.

Unlike currency futures, ETFs, which are traded through centralized markets, spot FX are private agreements between two parties.

The market where FX dealers trade with each other in the so-called interdealer market. A dealer is a financial intermediary that stands ready to buy or sell currencies at any time with its clients.

The role of the interdealer market is usually played by banks, that’s why it is also known as the “interbank” market.

The interdealer market is only accessible to institutions that trade in large quantities and have a very high net worth.

This includes banks, insurance companies, pension funds, large corporations, and other large financial institutions that manage the risks associated with fluctuations in currency rates.

A spot FX transaction is a contact between two parties to physically exchange one currency against another currency.

For example you are buying EUR/USD on the spot market, you are trading a contract that declares that you will receive a specific amount of euros in exchange for U.S dollars at an agreed exchange rate.

You are NOT trading the underlying currencies themselves, but a contract involving the underlying currencies.

It is called a spot market, but transactions don’t exactly happen “on the spot”.

The actual transaction is settled two business days after the trade date (known as T+2 “today plus two business days”)

For example, an institution buys EUR/GBP in the spot FX market.

The trade opened and closed on Tuesday has a value date on Thursday. This means that it’ll receive euros on Thursday.

However, not all currencies settle after two business days. For example, USD/CAD, USD/TRY, USD/RUB and USD/PHP value date is T+1, meaning today plus one business day will be that transaction date.

Now it becomes more complicated.

You have to know that trading in the actual spot forex market is NOT where retail traders trade.

Retail Forex

The spot market is not the only OTC market.

There is a secondary one that provides a way for retail (“poorer”) traders to participate in the forex market.

You are trading through different “forex trading providers“.

Forex trading providers trade in the primary OTC market on your behalf. They find the best available prices and then add a “markup” before displaying the prices on their trading platforms.

The spot market is not the only OTC market.

There is a secondary one that provides a way for retail (“poorer”) traders to participate in the forex market.

You are trading through different “forex trading providers“.

Forex trading providers trade in the primary OTC market on your behalf. They find the best available prices and then add a “markup” before displaying the prices on their trading platforms.

Brokers act as a counterparty here. They have an inventory of the assets and are ready to buy or sell with participants. They get their profits from the spread between the buy and sell prices of securities.

Although a spot forex contract normally requires delivery of currency within two days, in practice, nobody takes delivery of any currency in forex trading.

The position is “rolled” forward on the delivery date

Remember, you are not physically or digitally buying the currency itself, but you are trading a contract with the underlying currency.

It’s not just a contract, it’s a leveraged contract.

Leverage allows you to trade large amounts of currency for a very small amount.

Advantages of using retail trading broker:

Simple software – the trading platforms of retail brokers are very easy to learn. They have an extremely user friendly interface, decent graphics and good functionality. In general, they provide forex traders with everything they need.

Minimum initial deposit – some brokers who offer to open an account with a $ 1 minimum deposit. But they are rather the exception. Usually $ 100-500 is enough to open an account with a retail forex broker.

High leverage – the leverage of retail forex brokers varies between 1: 30 and 1: 500. This is very important because the higher the leverage, the less start-up capital you need.

Lack of commissions – as it became clear above, the broker is a party to the transaction and wins from the spread. With few exceptions, retail brokers do not charge commissions and naturally emphasize it in their banners.

Back to leverage, we will give you an example. If the broker provides you up to 50:1 leverage, you could trade valued up to $250,000 with the initial required margin of $5,000.

Retail forex transactions are liquidated by entering into an equal but opposite transaction with your forex broker.

For example, if you bought British pounds with U.S. dollars, you would close out the trade by selling British pounds for U.S. dollars.

This is a liquidating transaction.

What happens if you have a position left open at the close of the business day?
It will be automatically rolled over to the next value date to avoid the delivery of the currency.

This will be done automatically by your retail forex broker, who will keep on rolling over your spot contract for you indefinitely until it is closed.

When positions are rolled over, this results in either interest being paid or earned by the trader.

These charges are known as a swap fee or rollover fee. Your forex broker calculates the fee for you and will either debit or credit your account balance.

Retail forex trading is only SPECULATIVE.

You won’t take physical possession of the currency, but you will only speculate about the movement of the exchange rates, so you can benefit from the difference.

Keep in mind that in many countries spread betting will be considered illegal action. Despite being regulated by the FSA in the U.K.,the USA for example considers spread betting to be internet gambling.

Forex CFD
CFD comes from Contract For Difference and is a derivative product issued based on an underlying asset, through which you can trade the movement of these assets without having to physically own it.

The price of the Contract for difference moves exactly as the price of the market itself.

But trading in CFD has many advantages over trading in real shares. Some of them are margin trading opportunities, short sales opportunities, lower costs.

Simply said, CFD is a contract between a CFD provider and a trader, where one party agrees to pay the other the difference in the value of a security, between the opening and closing of the trade.

Through CFDs you can trade a currency pair in both directions. You can take both long and short positions.

You would make a profit, if the price moves in your favour and if it moves against you, you would make a loss.

This is because you simply speculate with the price movement and don’t have intention to ever take ownership of the currency.

This way you can gain exposure to price fluctuations related to the underlying currency pair without actually owning it.

To make it cleared you call a rolling spot FX contract a Contract for Difference.

We strongly advise NOT to bite your nails while reading about Forex! You will NEED something to bite when you start trading for real.

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NOTE: It should NOT be assumed that the materials presented in Nuubie (the methods, the articles, the techniques, or indicators) will be profitable, or that they will not result in losses. Any reliance you place on such material is therefore strictly at your own risk.
Risk Warning: Trading in CFD’s on Leverage involves substantial risk of loss to your capital, they are complex products and are not for everyone. Between 74-89% of retail investors lose money when trading CFD’s. Trade with caution.