What are the Best Ways of Trading Forex?
The forex market remains a huge global entity, and one that was worth an estimated $2.409 quadrillion as recently as 2019.
However, this market remains deceptively volatile and versatile, and there are various ways in which you can trade currencies while generating a viable profit.
We’ll explore some of these vehicles in further detail below, while asking what makes these options so popular amongst investors.
1. Spot Forex
We’ll start with spot FX trading, which refers to an “off-exchange” market that may also be described as being “over-the-counter” (OTC).
In the spot forex market, an institutional trader effectively buys and sells an agreement (or contract) to make or take the delivery of a specific currency. So, if you buy the EUR/USD pairing on the stock market, you’re effectively trading a contract which specifies that you’ll receive a specific amount of Euros in exchange for US dollars at a predetermined price.
The off-exchange forex market is definitely a large, growing and liquid entity, and one that’s also accessible 24 hours a day.
The lack of a central exchange is appealing to some investors too, although it may not be ideal for novice or inexperienced traders.
2. Currency Futures
Next up is currency futures, which are contracts to buy or sell a specified asset at a predetermined price at a future point in time (hence the name!).
This contract details the exact price and date at which a currency could be bought or sold, while futures trading benefits from being completely standardised and available through a transparent and well-regulated market.
As a result of this, price and transaction information are readily available to traders, which is ideal for newcomers to the market or those who are slightly risk-averse.
3. Currency Exchange-Traded Funds (ETFs)
A currency ETF is another popular forex vehicle, and one that can offer exposure to a single currency or a basket of assets depending on your wider strategy and outlook.
In simple terms, currency ETFs enable ordinary individuals to gain exposure to the forex market through a professional and managed fund, which instantly minimises your risk and negates the need to place individual trades in real-time.
Most importantly, currency ETFs make it relatively easy to speculate on forex prices, which in turn helps you to leverage currencies’ full potential as a derivative asset class.
Not only this, but you can invest in a currency ETF to successfully diversify your portfolio or hedge against specific currency risks, particularly those that are macroeconomic or geopolitical in their nature.