What exactly does "Trading Forex" mean?
- Thread starter kmiklas
- Start date
Almost unimaginable that people tried to trade spot forex (retail) without any feed.
Good salesmen probably. And people that had money but no clue what they were doing.
I took from start a datafeed that costed me 185$ a month (Teletrac and later satellite dish fromEsignal, at that time DBC) and Teletrac software that costed me 1850$ a month + 21% VAT.
My logic was to do it good or not to do it at all. Trading 1mio $ positions without realtime feed was unacceptable for me.
So everything in the FX market is exchanging one currency for another in some form. However, there are two basic forms: an outright or a swap.
If I exchange one currency for another, it's an outright. Outright happens with a value date, from "cash" - today, "tom next"-tomorrow, "spot"-T+2 and finally "forward spot" - over t+2. If you trade for immediate delivery (out to T+2), it's a spot transaction; any longer and it's a forward.
An alternative, which is frequently traded by the speculators is an agreement to exchange and re-exchange one currency for another. For example, I give someone dollars for Euros for immediate delivery and simultaneously agree to re-exchange Euros for dollars at a specified rate at some time in the future. These transactions are called swaps. Again, these can be spot (short-dated) or forward (long-dated).
I know next to nothing about the retail FX world, so this is institutional only. FX trading venues are highly fragmented and have a variety of business models. For example, it's totally normal for an FX trading venue to be a market-maker too. Most primes with a large base of clients would fall into that category (e.g. Morgan Stanley is). Then there are ECNs of various sorts, MTFs, etc. Usually, these venues are aggregated via some FX prime brokers that allow usage of their credit lines.
If I exchange one currency for another, it's an outright. Outright happens with a value date, from "cash" - today, "tom next"-tomorrow, "spot"-T+2 and finally "forward spot" - over t+2. If you trade for immediate delivery (out to T+2), it's a spot transaction; any longer and it's a forward.
An alternative, which is frequently traded by the speculators is an agreement to exchange and re-exchange one currency for another. For example, I give someone dollars for Euros for immediate delivery and simultaneously agree to re-exchange Euros for dollars at a specified rate at some time in the future. These transactions are called swaps. Again, these can be spot (short-dated) or forward (long-dated).
I know next to nothing about the retail FX world, so this is institutional only. FX trading venues are highly fragmented and have a variety of business models. For example, it's totally normal for an FX trading venue to be a market-maker too. Most primes with a large base of clients would fall into that category (e.g. Morgan Stanley is). Then there are ECNs of various sorts, MTFs, etc. Usually, these venues are aggregated via some FX prime brokers that allow usage of their credit lines.
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You're wrong because forex is a spot market. You are taking delivery of the product (in financial terms, not physical) with the consequences of that fact. It is expressed in daily marking to markets.
First let's make something clear here. Anytime you talk about any currency (spot, forex, futures) you are always talking in "relative terms", expressed in some other currency. There is no way around it. You can's talk about value (or buying/selling) of one currency without expressing it in other.
Now, Forex trading is essentially SPOT market transaction. Now you can do it by simply buying one currency at your bank, exchange dealer or online exchange place at notional value OR you can do on a trading platform using a margin. But buying spot on margin of course means that you are using someone else's capital that will cost you an interest everyday (depends on your broker). But it is a spot market, because you are talking the delivery of the other currency right away and you are therefore charged an interest differential between the two (positive or negative carry) on top of the interest rate for buying on margin.
The currency FUTURES are also expressed in relative terms (one currency relative to other) but the difference is that it is already a product with a margin and the interest rate differential (until expiration) is built into the future price that will converge on expiration into a spot price.
So when you buy (or sell) 1 Euro Future contract or 1.25 Eur/usd spot contract, you are doing the same thing if it is done in a very short time frame (day). Over days/weeks however, you need to consider negative/positive carry and interest for using margin when trading eur/usd because it is a spot market, and in case of future it's convergence toward spot (premium over spot).
It is the same concept with any currency pair (always a "pair", can't be any different), whether spot forex or a futures.
There is another interesting product however that also explains same thing. It is GOLD.
Gold can be "traded" in three ways. You can buy/sell GOLD physically paying in USD (or any other currency, which is irrelevant), or you can trade GOLD futures. However, you can also buy/sell XAU/USD contract (forex), which is essentially spot transaction + margin, therefore you have to include the interest rate on that currency and then pay interest for using brokers capital (margin).
Depending on whether you are short term trader or longer time investor, one or the other (futures vs forex/spot) might make more sense to you. There are also other benefits of one vs another, i.e. futures are standardized product (i.e. size) and forex/spot you can trade whatever you want to trade (fractional lots).
In shorter timeframe each way of trading currencies is the same. The difference is basically whether the leverage is built in (futures) or you have to pay for it (forex/spot) separately, on top of interest rate differential. If anyone claims different, then it's just semantics like claiming you're not a trader unless you're leveraged...
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From your example that trade would result in a loss, before commissions.
Regarding who's right, look up my answer earlier, you are right, trading wise these are the same, you either make money from correctly predicting the move or you don't, regardless of the small differences in products used (spot or futures) and it's consequences.
Everything in the Forex Market is exchanging One Currency Pair for the other side in either Buying or Selling the underlined Currency Pair - For example sake Lets say you are Buying GbpUsd Pair - Than you are hoping that the Gbp/side will increase in Rate per say - your stake outlay - If you are Selling GbpUsd Pair than you are hoping that Gbp/side is about to decrease in Rate per say - your stake outlay. & this is how you will eventually make a profit from these transactions.