Forex trading involves more than simply exchanging currencies like you would at a currency exchange counter while traveling. Instead, it often revolves around speculating on future price movements, similar to stock trading. Forex traders aim to buy currencies they expect to appreciate in value compared to others or sell currencies they anticipate will lose purchasing power.
To cater to different trader goals, there are three main methods of forex trading:
Spot Market: #
This is the primary forex market where currency pairs are directly traded, and exchange rates are determined in real-time based on supply and demand dynamics.
Forward Market #
Instead of executing an immediate trade, forex traders can enter into binding contracts with other traders to lock in an exchange rate for a predetermined amount of currency on a future date. These contracts are private agreements.
Futures Market #
Traders can choose standardized contracts to buy or sell a specific amount of currency at a predetermined exchange rate on a specified future date. Unlike the forward market, futures trading occurs on exchanges rather than through private contracts.
The forward and futures markets are primarily utilized by forex traders who want to speculate on or hedge against future price fluctuations in currencies. The exchange rates in these markets are derived from the spot market, which is the largest and most active forex market where the majority of forex trades take place.