It’s practically impossible to debate on trading types without mentioning forex trading. Foreign exchange trading is one of the trading sectors that has grown tremendously in the past years. This is explained by the fact that FX trading offers almost instant results. With simple analysis, you are able to make predictions on how currency exchange rates will change. This gives forex trading a considerable advantage over other forms of trade. If you’re still wondering why it keeps growing in such a competitive sector, then here are the answers you’ve been looking for. Let’s get right into it.
To get a clear grasp of forex trading, you need to have some background information on what forex exchange is. Foreign exchange in simple terms refers to a transaction in which one currency is being changed to another. Most people carry out forex exchanges on a daily basis without knowing it. If you’ve ever had to change your currency while on a holiday in another country, then, you already have some great forex trading basics.
Although currency conversion is usually done for practical reasons, most foreign exchange transactions are carried out with the sole purpose of making profits. This is explained by the fact that the amount of currency exchanged for a particular currency can either increase or decrease its value. A tangible example is what we’ve been experiencing with the dollar lately. The monetary value of each currency is determined by the forex market.
The forex market is a decentralised marketplace that determines all the aspects of currency exchange. This goes from buying, through selling, to the exchange of different currencies. The fact that the forex market is an over-the-counter marketplace with no central location gives room for banks, companies, funds, and even individuals to purchase and sell currencies freely between one another.
Based on the type of exchanges, different types of forex markets have been created.
- Future Forex Market: In this type of market, a contract is made to buy or sell a specific amount of a given currency at an agreed price and date in the future. This type of contract is legally binding. This is usually done with the intention of minimising the risks that come with forex trading.
- Forward Forex Market: This market is often confused with the future FX market because they are very similar. There is an agreed contract to buy or sell a given currency at a fixed price and date in the future. The only difference here is that this type of contract is not legally binding.
- Spot Forex Market: This refers to the purchase or sale of a given currency on the spot. The two parties involved agree to settle the trade once they’ve set a price for the exchange.
If you must understand the interest behind forex trade, a great start would be to compare it to the other types of trading that exist. Here are some of the most popular forms of trading:
- Crypto Trading: Trading based on cryptocurrencies is probably one of the most popular forms of trading. Ever since they were created, cryptocurrencies have been a serious subject of interest among traders. The fact that these currencies are not attached to any bank and are solely digital, makes them ideal for trading. Crypto trading basically relies on two main strategies. The traders can either speculate on the prices or simply buy a given amount of the currency with the hope of seeing the value of this digital currency increase in the future.
- Equity Trading: This type of trading relies on the buying and selling of a company’s shares or stocks, commonly referred to as equities, on the financial market. Similar to forex trading, these equities are usually traded in an over-the-counter marketplace accessible to everyone.
- Commodity Trading: Commodity trading works on the same principle as equity trading. The difference lies in what is being traded. This type of trade involves the purchase and sale of commodities, which are typically divided into four main categories. Metals commodities often refer to gold, silver, platinum, and copper. Other categories include; agricultural commodities, livestock commodities, and energy commodities.
Although the above types of trading are quite popular, other forms of trading are still common, and they all have different markets and platforms.
Now that you have an idea of what other trading sectors look like, here is why forex trading has been making headlines lately. Despite the volatile nature of the different prices when it comes to foreign exchange, the forex market keeps growing on a daily basis. This is due to the fact that it is the volatility itself that defines the trade and makes it incredibly interesting.
Forex trading makes you a keen observer. You have to study the market and the fluctuation it experiences. This fluctuation is influenced by many factors, which all have a role to play in the predictions you make. If these predictions tend to be correct, you can instantly enjoy your profits depending on the forex market you choose. This differs from other types of trading, where you have to wait for a certain amount of time to see the benefits of your trade. All this explains why foreign exchange trading keeps growing and gaining so much interest in the trading sector.