There are several options available for the trader who wants to trade forex instruments. You have options, futures and not least forex spots which are the most popular type of forex instrument traded. They each hold their own unique advantages and negatives. The difference between them may not seem that big for the inexperienced trader, but it’s definitely there and the way your earn profits is also different. In this article we will look at how spot forex trading stands apart from particularly forex futures as these can easily be confused.
Let’s look at futures first. Futures where originally developed as financial instruments that commodity suppliers and producers could use to fix their prices ahead of delivery. A company that uses oil in production could fix their prices at a low point and save some money. A supplier could also fix the price to guarantee his income. A future is a contract obligating the buyer and seller of the underlying asset to buy and sell at an agreed price at a future time. So the deal is made at the point of the sale/buy of the future, but the actual exchange of the asset takes place in the future.
A spot on the other hand is a trade that is carried out when two parties agree to buy and sell. Theoretically a buyer and seller put their orders out on the market and waits for someone to agree to pick it up, but in reality all forex spot trades are filled instantly because the market is so liquid. This is of course an advantage of the forex market, which is 50 times larger than the stock market and 15 times larger than the bond market. To recap, forex futures are contracts that obligate two parties to buy or sell at some agreed time in the future. Forex spots are trades between a buyer and a seller and are carried out instantly.
Before the internet revolutionized forex trading, spots were the domain of big banks and corporations only, which needed quick access to foreign currency to carry out a trade or investments. Today, spot trading is done instantly such as when you go to a money changer and changes one currency into another. The spot market is now huge and growing by the day.
Spot trading holds some other measurable advantages over futures trading. As you may know, all futures are regulated and traded on the Commodity and Futures Exchange which is regulated by the National Futures Association. The NFA takes a fee for carrying out the trades. Spots are not regulated as they are traded on the interbank market, which is non-regulated.
Spots are also available at lower lot sizes than futures, particularly if traded trough an mini or micro account.
In conclusion, spot forex trading holds many advantages over futures. Forex spots can be traded on most forex brokers and platforms.