What exactly does "Trading Forex" mean?

[kmiklas]

Hey All,

So, I'm in a debate with a friend at work about exactly what "Trading Forex" means.

- My understanding of Forex is buying and selling currency. For example, last year I bought GBP10000 for about USD12500. Soon after I sold it for USD12075, making a cool $71 after commissions. I think of this as "Forex Trading," but he says that it's just "currency exchange."

- He says that "Trading Forex" means trading the pairs; e.g., I get some kind of contract for a currency pair.

I responded:

- How can I trade the "pair?" If currencies move in relation to each other, then it's a wash; what I gain in one currency I'll lose in another. Is he talking about Forex futures and Forex options? Yes, they are a type of Forex... but is that what peeps generally mean when they say "Forex?"

Then he told me that I was off base; to read up and do some research, which brings me to the ET fountain of wisdom.

I feel like I'm missing something. This guy is pretty solid with this stuff; he worked for GS for a while. I'm on the programming side, and have a lot to learn about the business.

Can anyone shed light here?

Thanks, Keith

 

[Robert Morse]

I’m not an expert on FX, but I would say he is right. SPOT FX would be buying one currency with another while forex is a long/short non-deliverable pair. It is more like booking a bet on an forex platform with your FX broker as your counter party.

 

[comagnum]

Spot Forex & futures trades in pairs. You have the base currency & the counter currency.

Futures currencies work the same way, with one exception. The counter currency is always the USD. When you trade the US dollar (DX) the counter currency is a basket of other major currencies.

I believe banks like GS put on on a basket trades to isolate the base currency so that its performance is not dependent only against a single counter currency.

This is just my best guess - I may be wrong.

 

[Visaria]

Sounds like semantics to me.

 

[Xela]

I'm in a debate with a friend at work about exactly what "Trading Forex" means.

The term is widely used by different groups of people to refer to slightly different things.

Hence the confusion.

As a former forex trader myself, I agree with your friend.

My understanding of Forex is buying and selling currency.

Yes - that sounds simple, direct and logical enough, doesn't it?

I'm afraid it's not really quite as simple as that, though.

For example, last year I bought GBP10000 for about USD12500. Soon after I sold it for USD12075, making a cool $71 after commissions. I think of this as "Forex Trading," but he says that it's just "currency exchange."

I agree with him.

He says that "Trading Forex" means trading the pairs; e.g., I get some kind of contract for a currency pair.

"Some kind of contract for a currency pair" is exactly right.

Here's the point which I suspect you may have been missing: most people, most of the time, who "trade spot forex" are actually just betting against a counterparty. No currencies really change hands at all (at least not between the customer and the "broker", though the "broker" may sometimes choose to offset his own net liabilities through his own liquidity providers).

These customers' "transactions" aren't in any "real market". What's really being "traded" is an "artificial product" which is "dealt in" by the "broker" concerned (they're not really brokers at all, of course: they're just pretending to be, and many/most of their customers don't really understand the difference at all, as you can very readily see if you look at typical online discussions in a forex forum like Babypips or ForexFactory).

Is he talking about Forex futures and Forex options?

No; he isn't.

He's referring to two different ways of trading "spot forex".

One involves having a trade executed for you in the interbank market by a real broker (such as IB) in which actual currencies change hands and the broker's own financial involvement is non-outcome-dependent and limited to a commission/fee for accessing the market on behalf of the customer; the other (which is what at least 99% of retail forex traders do) is just a bet against a counterparty.

Does that help, Keith?

 

[tomorton]

What I do is very open and "honest" in a sense that ordinary forex "brokers" are not. I am in the UK and am spread-betting on the exchange rates between various currency pairs.If GBP/USD is 1.3700 and I think its going to go higher, I might bet £1 per point that it will go higher. The bet is with the spread-betting firm, nothing to do with currency or the spot forex market. The price I am betting on is not the market exchange rate, its the spread-betting firm's quote for this exchange rate, which might be say 1.3701 or maybe 1.3699. No matter how many bets they take, these don't affect the actual GBP/USD exchange rate, they're not part of the forex market.

I regret that financial spread-betting is not legal in more parts of the world, its really not the villain that some financial industry players say it is - I suspect they just don't like competition for private retail trader accounts.

 

[lovethetrade]

Hey All,

So, I'm in a debate with a friend at work about exactly what "Trading Forex" means.

- My understanding of Forex is buying and selling currency. For example, last year I bought GBP10000 for about USD12500. Soon after I sold it for USD12075, making a cool $71 after commissions. I think of this as "Forex Trading," but he says that it's just "currency exchange."

- He says that "Trading Forex" means trading the pairs; e.g., I get some kind of contract for a currency pair.

I responded:

- How can I trade the "pair?" If currencies move in relation to each other, then it's a wash; what I gain in one currency I'll lose in another. Is he talking about Forex futures and Forex options? Yes, they are a type of Forex... but is that what peeps generally mean when they say "Forex?"

Can anyone shed light here?

Thanks, Keith

He's correct, it's simply a currency exchange. The key difference between currency trading and a currency exchange is the use of leverage (margin lending).

Both types of transactions involve pairs, obviously.

 

[Xela]

The key difference between currency trading and a currency exchange is the use of leverage (margin lending).

If you'll excuse a dissenting view, it is actually possible to "trade" currencies without using leverage at all (and it's done daily, institutionally - and even retail speculators aren't obliged to use leverage).

In my opinion the key difference is that one is done via a genuine broker who accesses on his client's behalf a market to which the client doesn't himself have access, and the other is simply a bet against a counterparty in which no currencies actually change hands at all.

 

[lovethetrade]

If you'll excuse a dissenting view, it is actually possible to "trade" currencies without using leverage at all (and it's done daily, institutionally

Does the institution take delivery? If so, i'd regard that as an institutional fx transaction, not a trade because it's an exchange of currencies that affects their balance sheet.

and even retail speculators aren't obliged to use leverage).

Aren't retail speculators accessing the market using a margin facility?

 

[Xela]

Does the institution take delivery?

Not necessarily, no.

Aren't retail speculators accessing the market using a margin facility?

Usually, of course ... but not necessarily (and I believe there are even some countries where they're actually not allowed to use leverage?).

I think these are fairly minor points, really? The cause of the OP's confusion/discussion surely relates to the difference between actual exchanges of currencies and bets against counterparties.