According to Triennial Central Bank Survey of FX and OTC derivatives market, the number of daily forex transactions registered as of April 2019 was 6.6 trillion.
Forex, or foreign exchange, is a network of buyers and sellers, who transfer currency between each other at an agreed price. Foreign exchange trading refers to trading in one country's money that of another country.
The forex market is the world's largest financial market where trillions are traded daily. It is the most liquid among all the markets in the financial world. The currency market is open 24 hours a day, five days a week, with all major currencies traded in all major financial centers.
The major currency pairs that are traded include the EUR/USD, USD/JPY, GBP/USD, and USD/CHF. The most popular forex market is the Euro to US dollar exchange rate (EUR to USD).
Table of Content
Forex Market and Ways to trade in Forex Markets
The Spot Market:
The Spot Trade can be referred to the purchase or sale of a foreign currency, financial instrument or commodity for an instant delivery on a specified spot date. Foreign Exchange Spot contracts are the most common types and are usually specified for delivery in two business days.
Foreign Exchange spot transaction, is an agreement between two parties to buy one currency against selling another currency at an agreed price for the settlement on the spot date.
Foreign exchange spot is also known as the cash market. Cash markets or FX spot markets are heavily traded and typically have the tightest spreads, compared to forwards and futures markets.
It has the tendency to sometimes benefit from the overnight credits if the currency held has a higher interest rate than the currency sold. Unlike futures and forward contracts, there are no expiry dates on spot positions.
An FX Spot transaction is a rolling transaction. It means that the transaction is not allowed to settle, which would require delivering the currency sold and receiving the currency bought. Since traders aim to profit on the difference between when they buy and sell, positions are rolled for convenience.
The Forward Market:
Instead of executing a trade now, forex traders can also enter into a binding contract with another trader and lock in an exchange rate for an agreed upon amount of currency on a future date.
Inter-bank forward foreign exchange markets are priced and executed as swaps. It can be calculated based on the spot rate and adjusted to take into account other factors like the time until transfer and which currencies you're exchanging.
The Futures Market:
The price of all futures contracts is based on underlying asset which will be a currency instrument. They are standardized futures contracts to buy or sell currency at a set date, time and contract size. Unlike their forwards counterparts, futures contracts are publicly traded, non-customizable and guaranteed against credit losses by an intermediary known as a clearing house.
Forex, much like most future contracts, can be traded in an open system via live traders or entirely through electronic means with a computer and access to the internet.
The key difference between forex or spot traders and forex futures is that the former is over the counter (OTC), meaning it's not subject to exchange rules and regulations, while the latter, forex futures, is transacted on established exchanges.
Conclusion
Forex trading offers several advantages, such as flexibility in various types of contracts, and near 24*7 trading. There's one thing that investors need to understand that currency prices are constantly fluctuating, but at tiny amounts, which means traders need to execute large trades to make money.
Happy Investing!
