Chapter 3

Five FOREX Market

Introduction—Spot, Futures, Forwards, Options, Spread Betting

The overwhelming majority of currency trading volume is in the spot market. FOREX inevitably means spot trading to most participants. But it is possible to trade FOREX as a futures vehicle, as forwards or with options.

Forwards are traded on the Interbank market and are transactions for a fixed time such as 30, 60, or 90 days. While useful for hedgers and some long-term position traders, they are effectively unknown at the retail trading level.

The primary advantage of FOREX futures lies in the setup of futures markets being centralized, and as such, are more heavily regulated. Traders leery of market maker practices in retail spot FOREX may find comfort and a better sleep by trading currencies on a centralized, heavily regulated futures exchange. Indeed, an increase in futures FOREX has been identified in the past two years although volume continues to be dwarfed by the spot market. But the selection of traded currency pairs with reasonable liquidity is also smaller in the futures arena. A secondary advantage is that many popular technical trading methods use volume of trading and open interest. While aggregate volume is known in FOREX, daily figures are unobtainable because of the decentralized nature of the business. Attempts are under way, including those by the author, to synthesize spot FOREX volume and open interest statistics from other data using statistical methods. The correlation ...

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