Trading Forex is an acquired skill that virtually anyone can learn, given the right amount of patience. When you choose an online resource for placing trades and managing your account, it helps immensely if there is an explanation of key trading methods available on their site. That way, you won’t have to get bogged down in technical strategies that could take years to master. Instead, you can use the platform’s online strategy toolbox to make trades in real-time. Every seasoned Forex trader knows that it pays to focus on the currency pairs and the state of the market rather than worrying about the mechanics of a forward or option. Any trading platform worth its salt will serve as a tutor for people who want to learn the various trading methods “on the job.”
There are dozens of trading strategies in the world of Forex, but just a few are all you need to get into the market and make profitable trades. The key methods include spot, options, forward and CFD trading. Here’s a quick rundown on how each one works and what its pros and cons are. Note that the terminology is borrowed directly from the traditional equity markets and brokerage houses:
Spot Forex trades are the standard way to buy and sell a given currency. Participants in the contract simply agree to exchange currency for payment at the current price. There are no fancy caveats or conditions because the deal is done at whatever the current price of the currency is, as quoted on one of the major boards.
For traders who want to own the “right” to purchase or sell a given currency, the option method is the way to go. Set up almost identical to puts and calls of the equity market, an option gives its holder the right to either buy or sell a given currency at an agreed-upon price at some set date in the future. If the currency never rises or falls to the agreed price, then the option expires and is worth nothing. If, however, the currency does hit the strike price, then the holder of the option has the right to buy or sell X amount of currency ABC for the given price.
Forward contracts look a lot like options but differ in one major respect: a forward contract is binding on both parties who have agreed to exchange a given currency at an agreed-upon price at some specific future date and made available on their trading platform. When that date arrives, there’s no “option” to act, there’s a legal requirement to make the trade at the agreed-upon terms. Forward contracts can be highly profitable or not, depending on the difference between the market price of the currency and the contract price on trade day.
Contracts for Difference
CFDs are one way (options are another) for Forex traders to earn profits, or sustain losses, by speculating on the future price of a currency without having to own the currency. In many parts of the world, CFDs are the preferred way to trade stocks, bonds, and Forex.