Foreign Exchange Contracts – Forex Trading

Forex refers to the various currencies and currency derivatives are traded and the marketplace where they traded. There is no centralized location for forex market, it is an electronic network of banks, brokers, institutions and traders.

Forex market is the largest, most liquid market in the world. The forex market is open 24 hours a day, every day of the week, except for few public holidays. The forex market is open on some holidays on which stock markets are closed, though trading volume may be lower than usual on those days. The low capital requirements and the accessibility makes the forex trading very appealing for many traders. The combination of speculation, economic strength and growth, and interest rate differentials, drives the forex market.

Forex Lots

In the forex market, currencies trade in lots called micro which is 1000 worth of given currency, mini is 10,000, and standard lot is 100,000 worth of given currency.

Spot Transactions

Spot market is for immediate delivery. The business day calculation for delivery excludes Saturdays, Sundays, and other public holidays in either currency of the traded pair. Funds are exchanged on the settlement date, not the transaction date.

Forex (FX) Rollover

In general retail traders don’t take delivery of the currencies they buy, instead profiting on the difference between their transaction prices. For this reason, the currency positions get rolled over each day. So, it basically resets the positions and provides either a credit or debit for the interest rate differential between the two currencies in the pairs being held.

Forex (FX) Futures

An agreement between two parties to deliver a fixed amount of currency at a fixed date is called forex future. They are non-negotiable contracts, traded on exchange with the set values of currency and with fixed expiry dates. The difference between the prices the contract was bought and sold determines the profit of the trade.

If the futures contracts held until expiration, it would require delivery or settlement of the currency according to the contract. Therefore, most of the speculators buy and sell the contracts prior to expiration, realizing their profits or losses on their transactions.

Forex Market Differences

There are some major differences between the forex and other markets.

Fewer Rules

There are no strict standards or regulations, like in the stock, futures or options markets. The clearing houses and central bodies are not involved to oversee the entire forex market. In the forex market you are able to short-sell at any time because if you sell one currency, you are buying another. So effectively no short selling ever happens in forex market.

Leverage

The forex market has high leverage. That means a trader can open an account with the little amount and buy or sell much higher amount of currency. Leverage magnifies both profits and losses.

Full Access

The forex market is open 24 hours a day, therefore can trade at any time
of day, except on weekends, and some holidays when all the global financial centre are closed.