Spot Forex Trading
There are several options available for the trader who wants to trade forex instruments. You have options, futures and not least forex spots which are the most popular type of forex instrument traded. They each hold their own unique advantages and negatives. The difference between them may not seem that big for the inexperienced trader, but it’s definitely there and the way your earn profits is also different. In this article we will look at how spot forex trading stands apart from particularly forex futures as these can easily be confused.
Let’s look at futures first. Futures where originally developed as financial instruments that commodity suppliers and producers could use to fix their prices ahead of delivery. A company that uses oil in production could fix their prices at a low point and save some money. A supplier could also fix the price to guarantee his income. A future is a contract obligating the buyer and seller of the underlying asset to buy and sell at an agreed price at a future time. So the deal is made at the point of the sale/buy of the future, but the actual exchange of the asset takes place in the future.
A spot on the other hand is a trade that is carried out when two parties agree to buy and sell. Theoretically a buyer and seller put their orders out on the market and waits for someone to agree to pick it up, but in reality all forex spot trades are filled instantly because the market is so liquid. This is of course an advantage of the forex market, which is 50 times larger than the stock market and 15 times larger than the bond market. To recap, forex futures are contracts that obligate two parties to buy or sell at some agreed time in the future. Forex spots are trades between a buyer and a seller and are carried out instantly.
Before the internet revolutionized forex trading, spots were the domain of big banks and corporations only, which needed quick access to foreign currency to carry out a trade or investments. Today, spot trading is done instantly such as when you go to a money changer and changes one currency into another. The spot market is now huge and growing by the day.
Spot trading holds some other measurable advantages over futures trading. As you may know, all futures are regulated and traded on the Commodity and Futures Exchange which is regulated by the National Futures Association. The NFA takes a fee for carrying out the trades. Spots are not regulated as they are traded on the interbank market, which is non-regulated.
Spots are also available at lower lot sizes than futures, particularly if traded trough an mini or micro account.
In conclusion, spot forex trading holds many advantages over futures. Forex spots can be traded on most forex brokers and platforms.
Forex Option Trading
When most people think of trading currency they think of trading forex spots or currency pairs traded directly on the market. Not many people trade forex options, but they can actually be a very good method of either hedging your investment or outright speculating in them. An options is what the name implies: An option to buy or sell something at an agreed price sometime in the future. Now, you may think that sounds a lot like ‘futures’? That’s true, but not quite. An option is only that, the OPTION, to buy or sell something, while a future is a contract to do so, you must either buy or sell with a future. So with that out of the way, let’s look at options a little more closely and how you can make money from forex option trading.
Options are usually most discussed when talking about stocks and bonds, mostly stocks. I am sure you have heard of CEO’s and executives being given stock options, but ordinary traders also use stock options either on behalf of their companies or for themselves. Currency options are many times used by companies who do business abroad to hedge, or insure, themselves against currency risk. By having forex options they can offset some of the loss that a currency rate swings would mean. Options are essentially meant for this purpose, as a type of insurance used to deal with swings in the financial markets. Every portfolio of some size has options in it. But how can you use forex options to speculate and should you?
It’s not hard to trade options at all. There’s two types of options in general: Call and Put options or Buy and Sell. Call options are options to buy and Put options are options to sell.
Besides that there’s two sides of the Options market, the writers of options and the buyers of options. Remember that I told you how options where just options? That’s true if you’re a buyer of options. If you’re a writer on the other hand, then you must either buy or sell something if the buyer of the option wants too. This means that writers of options are usually only banks and big corporations.
Back to forex options. Forex option trading means trading long term. You buy an option to either sell or buy a currency in the future. Just like with futures you make money if the currency pair is worth more than what you agreed to (Call option) or less than what you agreed too (Put option). Or you can make money by selling your option before it expires. Option pricing is another much more difficult topic that we won’t go into here though!
Option trading may be for you,if you don’t want to spend every waking hour on the computer and prefer to think and trade longterm or you just want to hedge some other investments. If you’re looking for a more active type of trading, forex spots are probably more for you.
