Ways to Trade in the Forex Market

Overall, trading in the Forex market is pretty straightforward. Whether an investor trades directly, uses a broker, or an automated Forex trading system, he should familiarize himself with some of the basic ways to trade in the Forex market. The different types of transactions available in the Forex market are shown below.

Spot Transaction
A spot transaction refers to the current market rate of a currency. When the transaction is finalized between the two parties, the actual payment date, or settlement is two business days later. This waiting period allows the parties to confirm the agreement and co-ordinate any needed banking requirements.

Forwards
A forward transaction occurs in the future, at least two days from the agreed upon date. Most forward transactions occur about three months after the initial agreement. Here’s how it works. An investor agrees to buy or sell a currency at a particular rate by a certain date, regardless of any market rate changes. Suppose an investor agrees to sell 50,000 euros to a buyer on August 15 (three months down the line). Neither party knows the future exchange rate, but the seller is hoping that the euro will rise in value against the dollar, while the buyer is hoping for the opposite to occur.

Futures
A future transaction is a type of forward transaction – the only difference is the seller and buyer agree to a set exchange rate in the future, regardless of the rate. Similar to a forward transaction, both parties are counting on economic changes in their favor. Let’s say today’s exchange rate is 1.58788 euros to the dollar. The buyer and seller agree to a future transaction three months down the line at the exchange rate of 1.58976. The seller hopes that the actual exchange rate will be less (so he’ll be making a profit), while the buyer hopes that the exchange rate will be higher (so that he’ll be making a profit). On the given transaction date, the actual exchange rate is 1.5882. The seller ends up making a profit, while the buyer loses money. He has to buy euros at a higher rate than the actual rate.

Options
Similar to a futures transaction, the buyer of an option only has the right, but not the obligation to actually purchase the set amount of currency at a specific date and set rate.

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