Forex Trading Terms to Know and Understand the language of the market
Like any financial market, the forex market has its own jargon and terminology that you will need to understand before you start trading forex. Here are some of the most important — and most commonly used terms:
Spot trades are the largest by volume on the forex markets. The exchange between the two currencies is almost instantaneous — the deal must take place within two days. There’s no interest charged over those two days and the deal must be transacted in cash.
You can think of a forward contract as an agreement to make an agreement. The two parties agree on a rate and the deal takes place at a set date in the future at a pre-agreed price, regardless of what the market rates at that time might be. Deals can be transacted years after the agreement is made. Forward contracts are usually used to offset future risk.
A currency future is similar to a forward contract but tends to have a standard contract size and a fixed maturity date. You can think of forwards as customized contracts to suit two traders while currency futures are standardized products that you can pull off the shelf. It’s possible to buy and sell currency futures on an exchange, earning (or losing) on the change in market value. Investors can close the contract at any time before the contract’s delivery date.
Forex swaps are the most common type of forward transaction. The buyer and seller agree to exchange currencies then swap them back again at an agreed date in the future. Forex swaps allow sellers to liquidize excess currency, reducing risk, and lets speculators profit from changes in the exchange rate.
Foreign exchange option
A foreign exchange option (or FX option) allows the owner to change one currency for another at an agreed rate at an agreed date. Options are often used by businesses to protect themselves against falls in currency while waiting for payment.
As you can see, the forex market can seem complicated, but in practice, when you’re starting to trade forex, you can expect to be dealing mostly with spot trades and the occasional future, and you should understand fully what you are doing, and it’s risks before you start trading for real. Remember you can open a demo account for FREE with paddypowertrader.com and start practising today.