Forex Trading: Types of Forex Trading Methods

Forex Trading: Types of Forex Trading Methods

Forex remains to date the largest and most dynamic markets for traders and investors worldwide. With a daily trading volume exceeding $6 trillion dollars, forex allows the trader to profit from fluctuations in currency value. However, there is more than one way to trade forex. In this post, we will talk about the various methods to trade forex, and what are some pros and cons of each Forex trading method

First up, we have Spot Forex Trading. Spot Forex Trading refers to the direct exchange of currency pairs at the current market price and traders often participate in it through online platforms provided by brokers. The aim of spot forex traders is to speculate the movement of the currency pair by buying one currency and simultaneously selling the other. This method of Forex Trading is very popular among retail traders, as it is simpler and more liquid than the other types of trading methods. Do also bear in mind that liquidity translates to volatility as well, meaning to say that this form of trading method is high risk as well.

Next up, we have Forex Futures. Forex Futures Contracts are agreements to buy or sell a specified amount of currency at a predetermined price on a future date. Unlike Spot Forex Trading, Futures Trading occur on a regulated exchange, where standardize contracts are offered. These contracts have a fixed expiration dates as well. Forex Futures are normally favored by institutional investors and larger traders looking for hedging opportunites. For example, if they predict that the other currency will get stronger and thus materials from that country will be more expensive, they may set a Forex Futures Contracts stating that they will still be getting their materials at the current price until the contract expires.

Options Trading is the next trading method, where traders are given a right, but not the obligation to buy or sell a currency pair at a predetermined price (strike price) within a specified time frame. Put simply, you pay a sum to speculate the future price of the market. If your speculation is correct, you are allowed to execute the trade. If your speculation is wrong, you can choose not to execute the trade and let it expire. This form of trading is less risky as you do not have to execute the trade if it goes against your speculations, but the upfront premium you pay to speculate represents a sunk cost if your trade does not go as anticipated.

The fourth method would be Forex ETFs and Funds. This trading method provides a way for investors to gain exposure to currency markets without directly trading the currencies itself. For example, there could be a Forex ETF that tracks the performance of the US Dollar Index against other currencies. Investors can buy this ETF on the stock exchange, thus participating in the Forex Exchange through the stock exchange. Based on the performance of the currency, investors that bought into the ETF will either make a loss or a profit. This method is preferred by some investors as they do not have to trade Forex themselves, but can leave it to the professionals managing the ETFs or funds. Investors that do so have to be careful as these ETFs and funds are managed by private entities, which have a chance of being unregulated.

Last but not least, the fifth method is known as Spread Betting. Spread Betting refers to a form of derivative trading where traders speculate on the price movements of various financial instruments including forex pairs, without owning the currencies itself. In Spread Betting, traders bet if the price of a currency pair will rise or fall, and their profit and loss is determined by the difference between the opening and closing prices of the position, multiplied by the stake in point. Spread betting is very popular in countries that consider it a form of gambling as they do not have to pay tax on the profits earned from it. However, it is also because it is considered a form of gambling that it is not as heavily regulated, exposing traders to higher risks potentially.

The few methods mentioned above are not the only methods available for trading forex. However, it is information that is good to know, as it opens up different possibilities for the beginner traders, and provides investment diversification for the experienced traders as well. As with all investment methods, do your due diligence before investing real money in the medium of your choice. Most, if not all of these methods do have demo accounts for traders to try their hands on. Make use of these demo accounts to practice, so that you minimize the amount of losses at the start.