There are several different methods you can use when you do currency trading. Four of the most commonly used methods are futures, options, exchange-traded funds and spot methods. It is advisable that you learn about all these in order for you to determine the most suitable method for your use.
Futures are foreign exchange contracts with a due by date that is in the future. These contracts stipulate the price agreed upon and a date sometime in the future when the transaction will take place. This is a very well regulated market as contracts have been standardised and are traded via a central market exchange. The transactions can be accessed quite quickly because of the centralisation and standardisation of the market.
The options market allows you to buy and sell assets. It is possible for you to specify the amount you are willing to sell at. The expiration date that is specified is the date on which the option becomes valid, but you have the right to refrain from selling if you wish to. If you wish to continue with the option, you have buy or sell the currency at the predetermined price.
There are several disadvantages linked to this method of trading. It does not offer the same liquidity as other market and is limited to specific trading hours, unlike the currency spot market.
This is a relatively new method of trading. Funds used in exchange trading often carry a range of stocks and some of these are normally related to the forex market. Trading in exchange-traded funds allows investors the opportunity to broaden their portfolio spectrum by using various types of assets. The funds that are used for this method of trading are normally obtained via economic institutions that trade on a central exchange.
The disadvantage linked to this trading method is the specified daily trading hours, much like the options market. It also carried additional fees, such as trading commissions and transaction costs as it is linked to the stock market.
Spot Currency Trading
In this spot market, transactions are carried out in real-time. This market handles transactions immediately, at the prevailing market price. It is a simple method to use and this is the reason for its popularity.
The benefits linked to the spot market is the ability to trade all day and night, the tight spreads that are offered, and the liquidity of the market. This method of trading has made it possible for the individual investor to trade in this financial market as it is not a requirement to invest huge amounts of capital to commence trading.
The pitfall of this method of trading is the constant movement of prices and news releases that cause the movements to happen so quickly.
Many traders prefer to remain within the currency trading market and make use of the spot method. The futures market is more suited to large corporations who wish to hedge against the constant fluctuation in currency rates. The options market is generally utilised by investors who are speculating in the market. You should find the most opportune market for your trading style and use suitable strategies to trade.