Forex trading has become popular and because of this, a number of different ways of trading forex have been developed by traders. The most popular ways of trading include forex spot, futures, options and EFTs (exchange traded funds). Many of these have similarities, although there are some differences. Here we will look briefly at what each of these different ways of trading is.
Trading on the spot market means you are trading “on the spot”, or in other words, the currencies are traded immediately with the current market price. This market is simple to trade in and that is one of the thing that makes it popular. It also offers operation around the clock, liquidity and tight spreads. Trades on the spot market tend to have a two-day expiration. Traders then need to accept delivery of the currency or roll over the contract. Trading can begin with as little as $25, although this is not recommended.
Futures markets were created back in 1972 and they are an agreement to buy or sell an asset on a future date (hence the name). These are standardised contracts which are traded on a quarterly cycle with set expiration dates. Futures contracts are traded through a centralized exchange and are standardized which makes the market highly regulated and transparent.
Options give the buyer the option, but not the obligation, to buy or sell an asset at a specific price on the expiration date of the option. In other words, if you choose to sell an option, you would be required to buy or sell the asset at a specific price on its expiration date. Options are also traded on an exchange; however, compared to futures, these trades are much less liquid and market hours are limited for some options.
Exchange traded funds are created by financial institutions and could contain a combination of currencies and stocks so that each trader is able to diversify with different assets. As EFTs contain stocks, they are subject to trading commissions and transaction costs. Also, be aware that the market hours are limited with EFTs.