Ways
to Trade in the Forex Market
Overall, trading in the Forex market is pretty straightforward.
Whether an investor trades directly, uses a broker, or an
automated Forex trading system, he should familiarize himself
with some of the basic ways to trade in the Forex market.
The different types of transactions available in the Forex
market are shown below.
Spot Transaction
A spot transaction refers to the current market rate of
a currency. When the transaction is finalized between the
two parties, the actual payment date, or settlement is two
business days later. This waiting period allows the parties
to confirm the agreement and co-ordinate any needed banking
requirements.
Forwards
A forward transaction occurs in the future, at least two
days from the agreed upon date. Most forward transactions
occur about three months after the initial agreement. Here’s
how it works. An investor agrees to buy or sell a currency
at a particular rate by a certain date, regardless of any
market rate changes. Suppose an investor agrees to sell
50,000 euros to a buyer on August 15 (three months down
the line). Neither party knows the future exchange rate,
but the seller is hoping that the euro will rise in value
against the dollar, while the buyer is hoping for the opposite
to occur.
Futures
A future transaction is a type of forward transaction –
the only difference is the seller and buyer agree to a set
exchange rate in the future, regardless of the rate. Similar
to a forward transaction, both parties are counting on economic
changes in their favor. Let’s say today’s exchange
rate is 1.58788 euros to the dollar. The buyer and seller
agree to a future transaction three months down the line
at the exchange rate of 1.58976. The seller hopes that the
actual exchange rate will be less (so he’ll be making
a profit), while the buyer hopes that the exchange rate
will be higher (so that he’ll be making a profit).
On the given transaction date, the actual exchange rate
is 1.5882. The seller ends up making a profit, while the
buyer loses money. He has to buy euros at a higher rate
than the actual rate.
Options
Similar to a futures transaction, the buyer of an option
only has the right, but not the obligation to actually purchase
the set amount of currency at a specific date and set rate.
An automated Forex trading system platform provides
traders an online environment to place orders 24/7, from
the comfort of their home.
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