The Different Ways To Trade Forex

Because forex is so awesome, traders came up with a number of different ways to invest or speculate in currencies.

Among the financial instruments, the most popular ones are retail forex, spot FX, currency futures, currency options, currency exchange-traded funds (or ETFs), forex CFDs, and forex spread betting.

It’s important to point out that we are covering the different ways that individual (“retail”) traders can trade FX.

Other financial instruments like FX swaps and forwards are not covered since they cater to institutional traders.

With that out of the way, let’s now discuss how you can partake in the world of forex.

Currency Futures

Futures are contracts to buy or sell a certain asset at a specified price on a future date (That’s why they’re called futures!).

A currency future is a contract that details the price at which a currency could be bought or sold, and sets a specific date for the exchange.

Currency futures were created by the Chicago Mercantile Exchange (CME) way back in 1972 when bell-bottoms and platform boots were still in style.

Since futures contracts are standardized and traded on a centralized exchange, the market is very transparent and well-regulated.

This means that price and transaction information are readily available.

You can learn more about CME’s FX futures here.

Currency Options

An “option” is a financial instrument that gives the buyer the right or the option, but not the obligation, to buy or sell an asset at a specified price on the option’s expiration date.

If a trader “sold” an option, then he or she would be obliged to buy or sell an asset at a specific price at the expiration date.

Just like futures, options are also traded on an exchange, such as the Chicago Mercantile Exchange (CME), the International Securities Exchange (ISE), or the Philadelphia Stock Exchange (PHLX).

However, the disadvantage in trading FX options is that market hours are limited for certain options and the liquidity is not nearly as great as the futures or spot market.

Currency ETFs

A currency ETF offers exposure to a single currency or basket of currencies.

Currency ETFs allow ordinary individuals to gain exposure to the forex market through a managed fund without the burdens of placing individual trades.

Currency ETFs can be used to speculate on forex, diversify a portfolio, or hedge against currency risks.

ETFs are created and managed by financial institutions that buy and hold currencies in a fund. They then offer shares of the fund to the public on an exchange allowing you to buy and trade these shares just like stocks.

Like currency options, the limitation in trading currency ETFs is that the market isn’t open 24 hours. Also, ETFs are subject to trading commissions and other transaction costs.

Reprinted from babypips, the copyright all reserved by the original author.