How To Trade Forex

Overview

• Forex market allows trading in different ways: retail forex, spot FX, currency futures, options, ETFs, CFDs, and spread betting.
• Focus on individual (retail) traders, not institutional instruments like FX swaps and forwards.

Currency Futures

• Contracts to buy/sell an asset at a specified future date and price.
• Created by Chicago Mercantile Exchange (CME) in 1972.
• Traded on centralized exchanges, providing transparency and regulation.

Currency Options

• Financial instruments granting right but not obligation to buy/sell at a specified price on expiration.
• Traded on exchanges like CME, ISE, and PHLX.
• Limited market hours, less liquidity compared to futures or spot market.

Currency ETFs

• Offers exposure to one or multiple currencies via managed funds.
• Can be used for speculation, portfolio diversification, or hedging against currency risks.
• Subject to trading commissions and not open 24 hours.

Spot FX

• Off-exchange (over-the-counter) market; trades occur directly with a counterparty.
• Large, liquid, operates 24/7 without a central location.
• Primarily institutional interdealer market; retail traders access it through forex brokers.
• Institutional trades are agreements/contracts, not physical delivery.
• Settled typically in T+2 business days.

Retail Forex

• Secondary OTC market accessible to retail traders via forex trading providers (brokers).
• Retail traders trade leveraged contracts, not the actual currencies.
• Use of leverage allows control of larger positions with smaller initial margins.
• Positions often rolled over indefinitely to avoid currency delivery.

Forex Spread Bet

• Speculative derivative product without ownership of underlying asset.
• Profit/loss dependent on market movement against spread bet price.
• Illegal in the U.S., regulated by FSA in the U.K.

Forex CFDs

• Contracts for Difference (CFDs) are financial derivatives; price derived from underlying asset's market price.
• Allows trading in both directions (long/short) without owning the currency.
• Rolling spot FX contracts ruled as CFDs in the EU and UK.
• Illegal in U.S.; outside U.S., retail forex is often through CFDs or spread bets.

Key Takeaways

• Forex trading involves different instruments suitable for retail traders.
• Leverage is a significant component, enabling control over large positions.
• Retail forex trading is speculative, focusing on price movement rather than currency possession.
• Understanding each instrument’s market, regulation, and risks is essential for effective trading.