How To Trade Forex?

How To Trade Forex? Lesson No 5

Okay, now that we know what the forex market is and how huge it is, let’s look at how you may start trading.

So, how do you go about trading forex?

Well, traders have come up with a variety of methods for participating in and making currency moves. There are various strategies to invest or predict where currency values will go.

Retail forex, spot FX, currency futures, currency options, currency exchange-traded funds (ETFs), forex CFDs, and forex spread betting are the most popular options for average investors like us.

Quick note: We’re focusing on how everyday traders may achieve this. There are alternative options for large professional traders, but we are keeping things simple here.

Now, let’s look at how you, as an individual trader, might get into the exciting world of forex. Ready? Let’s go!

Currency Futures

Okay, let me explain to you the concept of currency futures in simple words.

Currency futures are agreements to buy or sell a specific currency at a specified price in the future. This is why they are termed “futures.”

The Chicago Mercantile Exchange (CME) first issued these contracts in 1972, when people sported bell-bottoms and platform boots.

Currency futures are unique in that they are systematised and traded in a single location, making everything extremely transparent and well-regulated. This means that you can simply learn about the prices and terms of these agreements.

You can learn more about CME’s forex futures here. Cool, right?

Currency Options

Considering options to be the equivalent of a special ticket in finance. This ticket provides you the option, but not a duty, to purchase or sell anything at a certain price on a specific day.

If someone “sold” this particular ticket, they would be committed to buying or selling at the predetermined price on the specified day.

These special tickets, also known as options, are exchanged on trades such as the Chicago Mercantile Exchange (CME), the International Securities Exchange (ISE), and the Philadelphia Stock Exchange (PHLX), just like futures.

But here’s the problem with FX options: the times you can play with these special tickets are restricted, and it’s not as popular as futures or the main market. Just something to consider!

Currency ETFs exchange-traded funds

Consider a Currency ETF (exchange-traded funds) to be similar to a unique money box. It may contain a single form of payment or a combination of them.

Why is this interesting? It’s a method, that is, for common people like us to participate in the world of high finance without having to engage in risky trading themselves. Consider it as having a financial advisor manage matters on your behalf.

Why would this money box be of interest to you? Perhaps you would like to:

Play It Safe: Protect yourself from the financial game’s ups and downs.

Take a Chance: Invest with a little bit of risk in the hopes of earning some additional money.

Remain Safe: Protect yourself against unexpected circumstances that may significantly change the worth of your finances.

It’s similar to using this money box for multiple purposes depending on your preferences for stability, risk-taking, or safety. Nice, huh?

There are some well-known money boxes available for people to enjoy trading.

Spot FX

Okay, so the spot FX market resembles a vast financial entertainment park, but it differs from the regular markets that you may be aware of.

Not in a central location Spot FX markets are global and open around the clock, unlike normal markets that have a fixed location. This type of market is referred to as “off-exchange” or “over-the-counter” (OTC).

No middleman: In this case, there isn’t a middleman overseeing the transactions. Instead, people participate in direct trade. It resembles personal agreements made by two people.

Not Just a Location There is no actual trading floor; all trading is done over the phone or electronically. The major players in this game are known as dealers, and they are frequently banks or other large financial institutions.

Exclusive Club: There is a unique club called the “interdealer” or “interbank” market, where these major participants trade with one another. However, it is not open to everyone; membership is restricted to large institutions.

Physical Exchange: In this spot FX game, major institutions aren’t just dealing with numbers. It’s an authorised transaction in which they agree to physically exchange one currency for another. It’s equivalent to making a binding commitment to trade a particular quantity of foreign currency at the current exchange rate.

So, when someone claims they bought EUR/USD on the spot market, it indicates they committed to exchange a specific amount of euros for US dollars at a predetermined price.

Here’s the deal: when we talk about trading in the “spot” FX market, we don’t actually swap real currencies. It’s more like making a transaction, a contract, using those currencies.

Even though it is known as a “spot,” this does not imply that everything happens immediately. In reality, when you trade at today’s market rate, the actual exchange occurs two business days later. T+2 stands for “Today plus two business days.“

So, if you bought some euros on Monday, you won’t receive them until Wednesday. They refer to Wednesday as the “value date” or “delivery date.”

However, not all currencies follow the T+2 rule. Some, such as USD/CAD, USD/TRY, USD/RUB, and USD/PHP, settle in a single business day (T+1).

It’s essential to understand that ordinary people like us don’t typically deal in this spot FX market. It is more for the big players. We frequently find other ways to participate in the currency game. Have you got it?

Retail Forex

“Now, let’s talk about this other market in forex that’s like a sidekick – it’s called the OTC market. It’s where average people like you and me can get in on the forex action.

But how do we get inside? That’s where the ‘forex trading providers’ come in.

Consider this: these sellers handle the heavy lifting for us in the main forex market. They seek for the best prices and then add a little extra, such as a markup, before displaying them on their trading platforms.

Consider how your favourite store buys items from a large wholesale market, raises the prices somewhat, and then sells them to you. In our instance, these sellers uncover good deals and add their own twist before displaying them to us on their platforms.”

Let’s discuss how FX contracts work. Normally, you are expected to hand over the money in two days, but guess what? In reality, nobody does that.

On the day you are expected to hand over the money, your position is “rolled” forward. Especially on the normal currency market. In forex, you do not trade actual money, instead, you trade contracts to deliver real money. These contracts are exceptional; they are known as leveraged contracts.

Now, what is leverage? It’s like magic, allowing you to control a large sum of money with a small amount of your own. You are allowed to do this by the company with which you trade, known as retail forex brokers. Consider this for only $2,000, you can participate in a trade for $100,000. That’s fifty times more than you began with!

But suppose you entered into a trade and were required to hand over $100,000 in euros. That is an issue because you only have $2,000 in your account. You can’t simply pay it off with cash. So, what should you do? You either close the trade before it becomes serious or do something called “rolling” it over.

To make things easier for you and prevent the hassle of passing over actual money, your forex brokers automatically “roll” your position for you.

Here’s how you avoid dealing with a large amount of euros in retail forex, you close your trades smartly.

So, after purchasing, say, British pounds with US dollars, you complete the transaction by selling the British pounds for US dollars. Offsetting or liquidating a transaction is similar to balancing an act.

Now, if you still have a trade open at the end of the day, don’t worry. Your retail forex broker takes care of it by rolling it over to the following day. They continue to do this until you decide to close it.

This practice of rolling things over has a fancy name: Tomorrow-Next or “Tom-Next,” which is just short for “Tomorrow and the next day.”

And here’s a little added nugget when they roll these positions, you might either earn or pay interest. This is referred to as a swap or rollover fee. Your forex buddy calculates the cost and either adds or subtracts it from your account balance.

Remember that retail forex trading is essentially a game of prediction. Traders attempt to predict and profit from how exchange rates move. No one is looking for actual amounts of money, it is all about making informed bets on currency changes. 

Forex Spread Bet

Spread betting is a term used in forex trading. It is not about owning the money itself, but rather forecasting whether its value will rise or fall.

Forex spread betting involves estimating where a currency pair’s price will go in the future. This price is derived from the standard currency market.

Your profit or loss is determined by how much the market moves in your favour before you finish, as well as how much money you bet on each minor price shift.

Companies known as “spread betting providers” provide this service. However, spread betting is not allowed in the United States. Although it is regulated in the United Kingdom, the United States considers it to be similar to betting on the internet so it bans it.

Forex CFD

Let’s talk about something called a Contract for Difference, or CFD. It’s similar to a financial instrument that allows us to predict if the price of an asset will rise or fall.

As a result, the price of a CFD is determined by the price of the asset that is being traded. You and the CFD provider make an agreement. One of you agrees to pay the other the difference in the value of something, such as a stock, from the beginning to the end of the transaction. It’s similar to betting on whether the thing’s worth will increase or decrease.

When we say Forex CFD, we mean an agreement to exchange the difference in the price of a currency pair from the beginning to the end. The price of the CFD for this money pair is linked to its money market price.

Here’s the deal in the EU and UK, “rolling spot FX contracts” are understood differently. The main distinction is that you are not seeking to actually have the money, instead you are making predictions on where its price will go.

In other words, trading a rolling spot FX contract is riding the waves of the money’s price without owning it. This is why they call it a CFD. CFDs are not used in the United States; they are referred to as a “retail forex transaction.”
Forex CFD traders are referred to as “CFD providers.” Outside of the United States, many people use CFDs or spread bets for financial trading.