Forex trading has become very popular amongst many investors all over the world. The trade is associated with good returns even from a small initial investment. Forex traders use different strategies to help them achieve their goals in the foreign exchange market. The fx market can be quite volatile as it is sensitive to many different factors. These factors can cause drastic changes in the markets without warning. Traders have to be very alert to what is happening in the forex markets all the time since changes occur on a constant basis. In order to be a successful trader, you must know how to trade under different market conditions.
Spot fx trading
All the different forex trading strategies can be grouped into two general categories – spot trading and forward trading. Most of the daily transactions in the foreign exchange market fall under spot fx trading. This category refers to immediate delivery off the currency, but extends over two days to cover all settlements and transactions. The transactions are completed over-the-counter, meaning they happen directly between the buyer and seller of the currency. Most of the retail spot fx trading is done for speculative and commercial purposes.
Participants in the foreign exchange market can come from any part of the world. Most of forex trading is done online so it is very easy to access any open markets as long as you have good internet connection. Furthermore, the global foreign exchange market remains open 24 hours a day throughout the work week. This is because the major trading sessions are located in different time zones and their opening and closing times overlap, meaning there will always be a session open at any time of day or night. This is one of the main reasons why fx trading has become so popular. Many people find it very convenient as they can still participate in trading on a part time basis.
Forward fx trading
Forward fx trading is similar to futures trading. Under this arrangement, traders buy a currency pair for settlement on a future date. This can come after several days, weeks, months or even years. Many of the deals under forward trading are settled within two months. The prices are quoted in two ways – outright quotes give the price of actual or standard dates, while broken date quotes give the price for any date other than the actual maturity date. Most of the forward fx trades are aimed at custom goals like meeting specific cash-flow requirements, hedging risks, and replacing existing spot fx positions. This type of trading is a bit complicated and is mainly done by experienced traders and the big institutions.
Some experienced traders choose to combine both spot and forward fx trading strategies. This enables them to have better control over trades so that they minimize risks while earning more profits. Spot fx trading is usually considered to have very high levels of downside risks. This is due to the high leverage offered by brokers, changes in interest rates, overnight changes on open positions and interventions by central banks to regulate exchange rates. Using forward trading on the same or related currency pairs will provide traders with some protection from the rapid price changes.
As a trader who is still new to foreign exchange trading, it is advisable to keep things simple as you learn and gain experience gradually. Avoid any complicated strategies that you do not fully understand. Start with small trades on a short term basis. This way, you will be more certain about the trades you are making. Furthermore, you will be able to recover in case you make a mistake that results in losses.