Forex Market

The Forex market is one of the most dynamic and active markets, branching into several types that enable traders to speculate on currencies using various strategies and approaches. Additionally, this market is distinguished by its inclusivity, offering multi-level investment options, high liquidity, and several other advantages that will be discussed in this article. 

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Types of Forex Markets

The foreign exchange market (Forex) consists of three main types, and selecting the appropriate type is a key factor in enhancing trading success. These types include:

Spot Forex Market
 This market is characterized by the immediate physical exchange of currency pairs at the trading settlement point, which occurs within a short period.

Forward Forex Market
 This market features forward contracts where an agreement is made to buy or sell a specific currency at a predetermined price and future date.

Futures Forex Market
 The futures market includes legally binding contracts to buy or sell a specific currency at a specified price and date in the future, distinguishing it from forward contracts.

The spot Forex market is the most popular and significant among trading markets, serving as the primary foundation upon which other markets rely. Furthermore, trading strategies and buy/sell movements are diverse, enriching the options available to investors. This article will delve into the key details of these markets.

Spot Forex Market

What is the Spot Forex Market?

This term refers to spot trades conducted through electronic trading networks, where one currency is exchanged for another instantly between the client and the counterparty. It is also known as the physical or cash market, as the transaction value is settled upfront using the current price of the financial instrument. According to the rules of this market, cash or goods are delivered two business days after the trade is completed. 

In this market, trading occurs directly between parties outside centralized exchanges (via private agreements), unlike the futures forex market, where contracts are made in organized central markets.

Spot Forex Market Terms

1. Spot Exchange Rate
 This represents the current exchange rate at which currency buy and sell transactions are executed at a specific time and place. This rate is used by online traders with brokers and is characterized by daily trading volumes exceeding five trillion dollars. The spot exchange rate is settled based on the trade date, plus an additional two business days, and no interest rate adjustments are made. If the counterparty wishes to delay delivery, they must sign a forward contract.

2. Settlement Date
 Refers to the date when the parties agree on the exchange rate for one of the fluctuating transactions. It is also used to avoid potential disputes arising from differing evaluation timings.

3. Spot Date
 The specific day set for settling transactions and executing the exchange of stocks or funds in real-time.

4. Spot Contracts
 Known as contracts that are concluded during the spot trade of assets, securities, or currencies with the intention of settlement.

5. Cross Exchange Rate
 Represents the rate used to determine the exchange rates of foreign currencies against the US dollar in the financial markets. In this context, not all foreign exchange transactions are conducted using the US dollar; invoices are coordinated for different currencies. This means exchange rates are determined between multiple currency pairs rather than being limited to the US dollar.

Comparison Between the Spot Forex Market and the Futures Forex Market

1. Liquidity
The spot forex market has the highest liquidity in the world, with daily trading volume estimated at around 6.6 trillion dollars. In contrast, the liquidity in the futures market is about 30 billion dollars daily.

2. Competition
The spot forex market allows traders to compete due to its high liquidity, enabling them to easily stop or close positions, except in cases where the markets are highly volatile. On the other hand, traders in the futures market face challenges due to limited liquidity.

3. Market Hours
The spot forex market operates 24 hours a day without interruption, allowing traders to trade day and night and take advantage of global breaking news. In contrast, futures markets close during specific hours, making them less flexible to global events.

4. Market Trading
Spot forex trading is direct and free, as traders engage with the market online without brokerage fees or commissions. On the other hand, the futures market requires complex routine procedures, adding complexity to operations.

5. Risk
The spot forex market allows investors to manage their accounts and reduce risks using mechanisms like margin trading. In the futures market, financial deficits in accounts result in immediate account closure.

What is the Futures Forex Market?

The futures forex market is a centralized financial market that allows investors to trade futures contracts, which are agreements to buy or sell a specified amount of financial instruments at a set price and delivery date in the future. These contracts are also known as derivative contracts, as the assets are priced based on the movement of the underlying asset.

Technically, futures contracts are financial agreements to buy or sell a foreign currency or a specific financial instrument at a set price and future date. These contracts are designed to meet specific needs and are traded outside organized exchanges, meaning they are not subject to stock exchanges.

Principles of Trading in the Futures Forex Market

There are two types of trades in the futures market:
• Buy trades
• Sell trades
When purchasing a commodity or a specific financial instrument, the investor commits to buying it at a fixed price on a future date. In other words, if the spot price of the financial instrument at the contract expiration is higher than the futures contract price, the investor makes a profit. On the other hand, if the spot price is lower than the contract price, the investor incurs a loss.

Advantages of Trading in the Futures Forex Market

1. Contracts are negotiable between the two parties. 2. The contract is determined according to the needs of the contracting parties. 3. The asset is delivered on the expiration date. 4. Contracts require specific terms to ensure the rights and obligations of both parties. 5. The contract price is not available to the public.

Futures Forex Market

What is the Futures Forex Market?

The futures forex market is where a contract is made between two parties, with the buyer committing to purchase a specific financial asset in the future, and the seller agreeing to sell the same asset at a predetermined price. During the contract, the type and quantity of the agreed financial asset are specified.

Futures Contracts
Futures contracts are agreements that obligate both parties to deliver or receive a commodity, foreign currency, or financial instrument at an agreed-upon price and fixed future date. These contracts are traded on organized exchanges that are regulated by a supervisory body, and the exchange sets all the conditions related to each type of futures contract.

Elements of Futures Contracts

1. Futures Price: The price agreed upon by both parties to complete the transaction in the future.
2. Delivery or Settlement Date: The agreed-upon date to complete the exchange process.
3. Contract Underlying: The financial asset involved in the contract, such as indices, securities, or foreign currencies.
4. Buyer of the Contract: The party committed to receiving the underlying asset in exchange for paying the agreed price in the future.
5. Seller of the Contract: The party committed to delivering the underlying asset in exchange for receiving the agreed price. 

Purposes of Investing in the Futures Forex Market

There are two types of investors in futures contracts:
1. Hedging and Protection: This type aims to protect the investor from future price fluctuations.
o Long Position Hedging: The investor agrees to buy the financial asset to protect against price increases.
o Short Position Hedging: The investor agrees to sell the financial asset to protect against price declines.
o Renewable Hedging: Extending the planned contract duration beyond the settlement date of the current contracts.
o Cross-Hedging: Using a different asset to hedge, known as indirect hedging.
2. Speculation: Aims to profit from price movements in futures contracts.  

Futures Contracts vs. Futures Contracts

The main difference between futures contracts and forward contracts is that futures contracts have standardized terms, including the number of units, quality levels, and delivery dates. Thus, futures are traded exclusively on global exchanges. Forward contracts, however, do not have standardized terms, as they are agreed upon by the parties involved.   

Investor Questions

Are futures contract gains larger than forward contracts? The gains in both types of contracts depend on the number of units and the price change compared to the contract price. Regardless of trading costs, returns do not depend on the type of contract itself.

Do futures and forward contracts affect economic inflation? High demand for futures and forward contracts can drive up the prices of financial instruments, which may lead to inflation in the prices of actual goods.
Which contract should you trade, and why? Futures contracts are more customizable, making them suitable for large companies but involving legal costs. On the other hand, futures contracts are more suitable for individuals due to their simplicity and ease of trading through a trading account. However, it’s important to be aware of the high risks associated with derivative transactions. 

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