This article looks at the methods that you can use to trade on the foreign exchange.
There is a range of foreign exchange trading methods available to traders. There are four popular methods used by traders and you are advised to learn the details about these and how to implement and use them. These are the spot, options, futures and exchange-traded funds methods.
The Spot Foreign Exchange Method
This is the market for transactions that are current and happening in real-time. This market deals with those transaction in currency trading that are carried out on the spot and where the real-time market price is used once the trade has been completed. The simplicity of this method is what appeals to many forex traders. Most individuals and companies who trade on trading platforms make use of this method.
The benefits attached to this method include liquidity, the ability to trade for 24 hours every day, and the tight spreads that are available. This method has made forex trading possible for the average investor as you do not require high investment amounts when you trade on trading platforms.
The risks involved with this type of trading method is the constant fluctuation and news announcements often cause these fluctuations to occur quite rapidly.
The Use of Options
This is a financial tool that allows you as a buyer the opportunity to purchase and dispose of an asset. The option includes the value the buyer is willing to sell at. The expiration date stated is the date the sale of the option becomes valid, however the buyer does not have to sell if there is no need to. If the trader wishes to sell an option, he or she has to dispose of or purchase the currency asset at the price that was predetermined when the option expired.
Options are known to have several disadvantages to its trading. It does not carry the same liquidity pattern as the spot or futures markets and, once again, is limited by the amount of trading hours.
The Use of Exchange Traded Funds
This is a new foreign exchange trading method that has become available. Funds that are involved in exchange trading carry a range of stocks, of which some will be related to the currency market. Trading in ETFs allows investment traders to widen the spectrum of their portfolios by utilising different asset types. The funds related to this method of trading are offered by economic institutions that then trade via a central exchange.
One of the main disadvantages linked to this method is the closure of the markets on a daily basis, similar to the options trading market. It also involves additional charges for transaction costs and trading commissions as it contains stocks.
The Use of Futures
Futures relate to forex contracts that will become due for closure at a point in the future. The contract stipulates an agreed price based on a date in the future when the currency will be bought or sold. This method was first used by the Chicago Mercantile Exchange during 1972. The futures market is extremely well regulated and transparent. This is due to the contracts having been standardised and traded through a central market exchange. The standardisation of the marketplace makes it possible to access the transactions quite easily.