Investors can trade from almost anywhere in the world as long as they have Internet access. In a nutshell, investors who trade forex either buy and sell currencies or use contracts to speculate on price fluctuations within the FX market.
Forex traders deal with two currencies at the same time. According to bestbrokers, the forex trading forms are four: spot forex, forex forwards and futures, forex options, and forex swaps. These are contracts between two or more parties that allow traders to speculate on price movements. In the lines below, we will discuss all of them to determine the one that is best for beginners.
Spot Forex Trading
Spot forex trading is the most popular form of forex trading among investors. As the name implies, it allows investors to buy or sell currencies at the current market rate on the spot date. The spot rate is the price a buyer pays for a given foreign currency in another currency. In a nutshell, spot forex trading is all about buying and selling currencies for immediate delivery. It is suitable for both inexperienced and well-versed traders.
Investors who opt for forex trading in the spot market are buying one currency and selling another one. The currency you are buying is called the base currency, and the currency you are selling is the quote currency. If you buy a base currency with the expectation that its price will rise in value against the quote currency, you go long. If you sell a quote currency because you believe its price will fall against the base currency, you go short.
Forex Forwards and Futures Markets
Futures are contracts between two parties to buy or sell a given asset at a predetermined price on a given day in the future. The contacts include information about the price at which a currency will be bought or sold and the day on which the exchange will take place.
Forex futures and forex forwards are pretty much the same. Both are financial derivatives that allow investors to buy and sell currency pairs at an agreed time and price. There are several fundamental differences between the two of them.
Unlike forex forwards, forex futures are transacted on established exchanges. Thus, they are strictly regulated. Forex forwards, on the other hand, trade on the over-the-counter (OTC) market. This means that currency trading is done without the intervenience of an exchange. Furthermore, forwards are negotiated between the parties according to their needs and preferences, while futures are standardized contracts.
Forex Options Trading
Forex options are derivatives that provide traders with the opportunity to buy and sell currency pairs at a specific price and date. The price is called the strike price, and the date - the expiry date. Unlike the other forms of forex trading, currency options do not oblige the investor to complete the purchase. Many traders prefer currency options because they have a lower potential risk.
There are two types of forex options - puts and calls. The call option is the right to buy currency at a fixed day and price, while the put option is the right to sell an asset at a fixed day and price. Investors buy call options if they believe that the base currency will rise in value against the quote currency before the expiration date. Traders buy a forex put option when they think that the base currency will drop in value against the quote currency.
Foreign Currency Swaps
FX swaps are contracts between two parties in which one of the parties borrows one currency from a second party and lends another currency to it based on the current spot rate. The two integral elements of an FX swap agreement are swapping principal and interest payments. It is crucial to note that FX swaps are OTC derivatives.
Currency swaps can be fixed-for-fixed or fixed-for-floating swaps. The former allows the two parties to pay each other a fixed interest rate on the principal amount (the original amount of money borrowed in a loan). The latter allows one of the parties to swap the interest cash flow of a fixed-rate loan with the other party that holds the floating-rate loan. FX swaps are used as a hedge against potential movements in currency exchange rates.
No matter what kind of an asset you decide to trade, there is always a certain level of risk. It is hard to say which form of forex trading is best for beginners because it all depends on your goals, the amount of time you can spend on trading, the level of risk you are willing to take, and others.
We would advise rookie investors to trade spot FX because it allows them to trade for immediate delivery in the spot market. In our humble opinion, forex options trading is another good alternative for inexperienced traders because there is no obligation for delivery.