Forex trading involves two major ways of trading, viz. Forex futures and Spot Forex. The similarity between the two kinds of trading is that both involve the buying and selling of foreign currencies. However, there are marked differences in the mode of execution. In spite of the accessibility of Spot Forex, Forex future is gaining in popularity in recent times.
Learn to distinguish Forex trading methods
When we talk of Forex trading we usually refer to Spot Forex. As the name suggests, Spot Forex involves trading with exchange rates of the time when the trading is done. The name Spot (Single Payment Option Trading) Forex is supposed to have been derived from the concept of On-the-Spot transaction.
However, Forex future trading is distinctly different from Spot Forex. The concept of time is introduced in Forex future trading. Traders conduct the trading based on the predetermined value of a currency pair at some point of time in future. This requires the investors to do extensive research for anticipating the probable exchange rates in the future. After hours of analysis and research, the investor determines the future rates and then decides the current rate at which the currency pair will be exchanged. This method of trading is also called Futures Contract. The concept behind Forex future trading is that a trader will pay a certain amount for the currency irrespective of the future changes in the rates of exchange.
Origin of the Forex future trading system
The idea of Forex future trading is not new. This system has been into existence from the days of the merchants. It was introduced by the merchants to cut down on the risks and ushering in stability in the prices of commodities. During the execution of any deal, if any changes occur in the prices due to various reasons, either of the party involved in the deal will suffer huge losses. Forex future trading minimizes chances of such losses.
Future Contracts state the date and time for the exchange. The contract cannot be violated with any rise or fall in the exchange rate. In the absence of the Forex future trading, either of the parties can draw undue advantage from the opponent party. Both the involved parties will have to study the trend of the market and then go on to take a decision. The only way of profiting from Forex future trading is to hope for the best.
This idea of future contacts has taken over the Oil Industry as well. So, even though the prices of oil fall or rise, it takes time to see the actual differences in the market.
Advantages of Forex future trading
In Forex future trading, traders try to wrap up their positions prior to the settlement date. This is done as the cash payments are calculated daily. A trader, thus, gets a chance to re-think about the deals he or she made and its effectiveness. Traders enjoy lower transaction rates and avail lower spreads with Forex future trading.
Disadvantages of Forex future trading
Forex future trading calls for greater account balance. This kind of trading happens only at the Exchange and the trader has to conduct the trade within the sessions.