Forex Trading is trading currencies from different countries against each other. Forex is acronym of Foreign Exchange.
For example, in India the currency in circulation is called the Rupee (INR) and in the United States the currency in circulation is called the US Dollar (USD). An example of a forex trade is to buy the Rupee while simultaneously selling US Dollar. This is called going long on the INR/USD.
If you have travel out of your home country before, you have interacted with the foreign exchange market and you didn’t even know it. If you travel from the India to United States, you trade your Rupee for US Dollars at a bank, airport teller, or any currency exchange service. In trading your Rupee for US Dollars, you participated on the global forex market.
Spot Market and the Forwards and Futures Markets:
There are three ways that institutions, corporations and individuals trade Forex:
- Spot Market
- Forward Market
- Future Market
What is the Spot Market
The spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, economic performance, current interest rates, sentiment towards ongoing local and international political situations , as well as the perception of the future performance of one currency against another. When a deal is finalized, this is known as a "spot deal". In this transaction one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value.
What is Forward and Future Markets
The forwards and futures markets deal in contract instead actual currencies, that represent claims to a certain currency type, a specific price per unit and a future date for settlement. Contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves.
In the forwards market, contracts are binding and can also be bought and sold before they expire. The forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well.