04 Different FOREX Markets to Trade
Are there Different FOREX Markets to Trade? Yes there is, but depending on what you are doing some are better than others.
But this 5 trillion is actually made up from many different FX sub-markets that you can trade in. The one that most retail traders trade in, which is also one of the largest (and is the market GLS Equity trades in) is called the Forex Spot Exchange Market.
The Spot Exchange market is one of the largest for many reasons, but mainly because it is derived directly from the real underlying asset.
There are many different FX markets that you can trade in with more and more being created all the time.
Here is the breakup of largest markets displaying the average daily volume from 2016:
- $700 Billion in Outright Forwards
- *$1.654 Trillion in Spot Transactions
- $254 Billion in Options and other products
- $96 Billion Currency Swaps
* The spot market is where we mainly trade, along with most other retail traders.
And here is the 4 main Forex markets available for retail traders:
- Spot Market
- Futures (Forward Contracts)
This course is focused on the FOREX Spot Market. But we will go over each of these 4 different markets briefly in the following section.
The Forex Spot Market is Decentralized.
This is called OTC or Over The Counter. It means that there is NO central exchange that all trades go through. For us retail traders, our trades (in general) are passed on from our brokers to their liquidity providers and are executed directly with them. But sometimes these can be traded directly with other traders. Or the broker can take the other side of our trade (not an ideal scenario as we will discuss later on).
Most broker’s liquidity providers come from the Interbank Market.
larger brokers generally equals better pricing potential… Like most things. More buying power equals better pricing.
In the FOREX Spot market what you are actually trading is a contract that requires delivery in two business days.
But because we are speculative traders and do not actually want physical delivery of the cash we Rollover these contracts every day. We close the current 2 day contract and open another the next day out.
No, we don’t do this manually, it is done automatically for you by your broker.
Most FX traders don’t know it happens at all. And to be honest you don’t really need to know, it all happens behind the scenes with zero input from you. But it does happen and it happens every day at 5pm EST. Unless you close your position before 5pm.
If we let our contract expire we would need to settle the underlying money in cash.
For example if you were long 1 lot of the AUD/USD at 0.78549. And then the 2 day contract expired you would need to give your counter party $78,549.00 USD in cash and they would give you $100,000 AUD in cash.
When we are just trading FX for speculative reasons we do not want to go to all the trouble and expense of dealing in the actual underling product. There is simply no need to.
What does all this mean for you as a trader?
Nothing really, it is just good to know how it works
Do you need to understand all of this to be a profitable trader?
Do you have to do anything to ensure you don’t get delivered a pile of cash?
Nope, it all gets done automatically for you.
Note: There is more on this under section 09 Rollover, Swap & Interest of this course.
Forex Futures Market (Forward Contracts).
This market is traded via a central exchange like the Chicago Mercantile Exchange (CME). Which means when you make a trade in this market, the exchange is the counter party to EVERY SINGLE TRADE. And everyone sees the exact same price.
This can be a great market to trade, but it is only possible to trade this market during Chicago business hours. And is a LOT less liquid than the FX Spot market.
What is a financial Option?
An “option” is a contract that can be either bought or sold and gives the:
Buyer the option to but not the obligation to, buy or sell an asset at a specified price at a future date and time.
Seller the obligation to (if asked to) buy or sell an asset at a specific price at a future date and time.
Options are also traded on a central exchange, such as the Chicago Board Options Exchange.
However, the disadvantage in trading forex options is that market hours are limited for certain options. And again the liquidity is a lot less than the FX spot market.
There are also Binary Options, these are a form of credit spread and are very simple. There are a lot of dodgy brokers offing these, but if you can find a decent one you can make good money here. This is the broker we use for this, they are also great for smaller accounts starting and also offer demos: Good Binary Option Broker
Traditional Options trading can be fairly complex and are not the topic of this course. So this is just a brief overview letting you know there are other FX markets to trade in.
Forex ETF’s (Exchange Traded Funds)
Like Options and Futures, ETFs also trade on exchanges, so again you are limited to exchange hours and potential liquidity issues..
Because ETFs are not real tangible assets (they are a form of derivative) and they are issued by third party fund managers and product issuers they may also involve issuer specific counterparty risk.
So although there are Different FOREX Markets to Trade. But generally the easiest and best is the Spot. And for this reason the remainder of this course we will be just focusing on this FOREX Spot market.
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