Currencies in Forex Spot Trades and Currency Futures
Many traders opt for spot foreign exchange trading over currency exchange trading because of the greater liquidity offered by the Spot foreign exchange market. The cost of trading is also lower as compared with currency futures. Financial institutes, banks, and brokers in spot foreign exchange can quote markets round the clock.
Moreover, the spot foreign exchange market is not held back by exchange and fees imposed by regulatory authorities like National Futures Association or NFA. And, these are generally passed on to the customer as higher commissions. Because of this, almost all professional traders and institutions carry out most of their Forex dealing in the spot forex market and not through currency futures.
The working principle for trading spot forex is similar to that of currency futures. The difference lies however on the way the currency pairs are quoted. In Currency futures, the quotes are always made with currency versus the US dollar. In Spot forex, some currencies are quoted like this but for some other pairs, it is just the opposite, which is US dollar versus the currency.
In spot forex, for example, EUR/USD is quoted just like it would be quoted for Euro futures. This means, if the Euro strengthens, EUR/USD will rise just as the case with Euro futures. But, for USD/CHF, which is quoted as US dollars with respect to Swiss Francs, is the opposite of Swiss Franc futures. So, inn this case, if the Swiss Franc strengthens with respect to the US dollar, USD/CHF will fall in spot forex and will rise in Swiss Franc futures.
For spot forex the rule is the currencies are quoted in terms of the first currency in the pair, in terms of direction. If you take the two previous examples, EUR in EUR/USD and USD in USD/CHF is the currency that is being quoted.
Some spot currencies move parallel to the futures contract and some move inversely to the futures. For example, GBP/USD, EUR/USD, AUD/USD, and NZD/USD move parallel in spot and futures. But, USD/JPY, USD/CHF, USD/CAD move inverse for spot and forex.
Spot trading has an advantage over trading currency futures contracts. The first is the margin rate or leverage that clients are offered, which is low for trades done 24 hours a day. In currency futures, however, the client receives one margin rate for day trades and a different margin rate for overnight positions. In spot, the margin rates vary from 1 to 5% depending on the size of transactions.
June 26th, 2008 at 2:00 am
[...] Original post by Forex Recipe [...]
June 26th, 2008 at 2:35 am
[...] Original post by Forex Recipe [...]
June 26th, 2008 at 2:50 am
[...] Forex Recipe wrote an interesting post today onHere’s a quick excerptCurrencies in Forex Spot Trades and Currency Futures June 26th, 2008 Many traders opt for spot foreign exchange trading over currency exchange trading because of the greater liquidity offered by the Spot foreign exchange market. The cost of trading is also lower as compared with currency futures. Financial institutes, banks, and brokers in spot foreign exchange can quote markets round the clock. Moreover, the spot foreign exchange market is not held back by exchange and fees imposed by regul [...]
June 26th, 2008 at 3:00 am
[...] Original post by Forex Recipe [...]
June 26th, 2008 at 4:25 am
[...] Original post by Forex Recipe [...]
June 26th, 2008 at 4:35 am
[...] Original post by Forex Recipe [...]
November 8th, 2008 at 4:49 am
automated forex trading software…
I can’t believe wachovia merged with WF, if things turnaround as they should, WF will become probably the largest bank in america with JP morgan chase 2nd with their acquisition of WAMU….