FOREX Trading Options
The FOREX market is the largest trading market in the world and offers a number potential benefits for traders. If you're interested in breaking into the currency exchange markets, there are four ways to trade. Each offers the large volume and liquidity essential to turning a profit as a day trader, each requires its own expertise and carries its own risk.
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Spot Market
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The spot market is where actual currency trades hands. By far the most popular trading option, trading currencies "on the spot" is fairly straightforward. Trading in the spot market is usually the cheapest option, as trades typically carry no commission and spreads -- the difference between the buying and selling prices of a currency -- are very tight. You can open spot market accounts with a small initial investment and trade 24 hours a day for all five weekdays that the markets are open.
Futures Market
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Like commodity futures, these are contracts to trade specific currency pairs for a specific exchange rate at some point in the future. FOREX futures are nearly as liquid as the spot market and enjoy the same 24-hour, 5-day-a-week trading schedule. Futures are slightly more complicated than spot markets, as their value depends on the movement of exchange rates over time. Futures contracts are more standardized than exchange rate spreads, which affect the way the market behaves and therefore affects trading strategies. Futures contracts do have commissions, but they are typically quite small.
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Options Market
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As with stocks, futures options give the holder the right -- but not the obligation -- to trade a currency pair at a specific price at some point in the future. Futures options can be traded on their own, or used in tandem currency positions to hedge bets and cover losses. Options markets are somewhat limited -- you can only trade options on specific exchanges, and that limits the hours you can trade as well -- typically between 9:30 a.m. and 4:00 p.m. (EST).
Exchange-Traded Funds
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Currency Exchange-Traded Funds pool investor money like a mutual fund but trade like a stock. In most cases, a currency ETF will track with one currency pair -- U.S. dollars and euros, for example. ETFs trade on regular stock markets, so they keep stock market hours. Liquidity is somewhat more limited than with the spot and futures markets, and there are trading fees and commissions. ETFs can be a good way to diversify without the need for active trading, however, as they can be added to any existing stock portfolio.
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