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Types of Trading Forex – What is Involved?

by gbaf mag

The forex market is an over the counter or worldwide market for the trading of global currencies. This market determines international exchange rates for all currencies. It includes all financial aspects of purchasing, selling and trading currencies in current or predicted exchange prices. Unlike a traditional market, forex operates 24 hours and is easily accessible for virtually every country in the world. Although there are many different types of forex software available, the most popular ones are the following:

Futures and Forward Contracts. This is the familiar back and forth process of moving forward with one or more transactions. The basic idea is to purchase future goods or services from another party at a later date at a prearranged price. You in turn agree to pay interest or other charges to secure the future payment. Many futures and forward contracts are traded on stock exchanges.

Forex Day Trading. This is a type of forex trading activity in which the principal deals are made on the same day that financial markets are open. The foreign exchange trader buys and sells currencies on the same business day. This transaction takes place through automatic transfer systems that are linked directly to banks and other clearinghouses around the globe.

Spot Exchanges. These are electronic “auctions” or exchanges that trade futures and base their transactions on current exchange rates. Examples are Commodities Futures Exchange (CFEX) in Chicago and the New York Board of Trade (NYBOT) in New York City. In the spot market, foreign currencies are bought and sold “spot” (on the same exchange). There are no actual physical commodities or goods being traded. Financial institutions typically participate in these exchanges.

Forward Contracts. With futures and spot markets, traders make purchases from producers of commodities or goods that are listed on the futures or spot markets. Once purchased, the trader then has the option to purchase additional shares of stock that are listed on the producer’s behalf. When these stocks are bought, they are then turned over to the dealer so they can sell them for delivery to buyers. These contracts allow traders to purchase goods when they are low and sell them when they are high.

Currency Trading. One of the most popular ways to make money on the Forex market is to trade currency pairs. Most investors use the U.S. dollar with European and Japanese yen, British pound with the European Euro, and U.S. dollar with the Asian currency. Many investors use this form of Forex trading to purchase U.S. dollars when other currencies are weak and to make profits when the value of the currencies go up. Foreign currency trading also makes it possible for individuals to purchase commodities like oil when they are at low prices and resell them when the prices go up. This is the essence of Forex speculation.

Forex pairs also include those traded between particular currencies. For example, the most common currency pair in the foreign exchange market is the EUR/USD. When a person buys this currency pair, he makes a purchase of one U.S. dollar and one European currency. This transaction, when paired with a similar transaction from a seller, will produce a profit for the trader who made the original purchase. The two transactions match because both parties agree that the euro is the stronger exchange currency and that the dollar is the weaker.

Long Betting. Traders can invest in the foreign exchange by trading long if they want to bet against another party. They make long positions in the hopes that the other party will go long and that they will go short. For example, if someone is bullish on the euro and thinks it will go long, the trader may start to buy the EUR/USD if they decide to go long.

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