You know, when people ask about the different ways to trade forex, it really opens up a huge range of possibilities. The forex market is this massive, incredibly liquid beast – easily the biggest in the world. And because of that, traders have so many diverse instruments and methods at their disposal to speculate on currency movements.
In this detailed guide, I will lay out seven major ways you can get involved in forex trading. We’ll cover:
- Currency futures
- Currency options
- Currency exchange-traded funds (ETFs)
- Spot forex (over-the-counter market)
- Retail forex
- Forex spread betting
- Forex contracts for difference (CFDs)
Let us now elaborate on them further.
Ways to Trade Forex – Comparison
To help you understand the various financial instruments, we created the table below, which compares each trading method’s key features, advantages, disadvantages, and suitability.
| Method | Key Features | Pros | Cons | Suitable For |
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| Futures |
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| Options |
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| ETFs |
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| Spot |
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| Retail |
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| Spread Betting |
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| CFDs |
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The currency futures
In futures contracts, a trader agrees to buy or sell an asset at a specific price later on in the future, hence the name futures contracts. This concept is the same for currency futures contracts where a trader agrees to buy or sell a currency at a predetermined price and specific date.
They are traded on centralized exchanges, such as the Chicago Mercantile Exchange (CME), which introduced currency futures in 1972.
In futures contracts, there is transparency and regulation because they are standardized and on a centralized exchange. All transaction information and even the price are accessible.
Trading Mechanics:
- Currency futures contracts have standardized contract sizes (e.g., 100,000 units of a currency)
- Contracts expire on specific dates, usually quarterly
- Prices are quoted in terms of the underlying currency pair (e.g., EUR/USD)
- Traders can take long (buy) or short (sell) positions
Order Types:
- Market orders: Execute at the best available price
- Limit orders: Execute at a specific price or better
- Stop orders: Execute when the price reaches a specified level
Trading Strategies:
- Trend following: Enter positions in the direction of the overall trend
- Hedging: Offset currency risk by taking opposite positions in futures
- Spread trading: Simultaneously buying and selling different contract months
Examples:
- CME Euro FX futures (6E) track the EUR/USD currency pair
- CME Japanese Yen futures (6J) track the USD/JPY currency pair
Advantages:
- High liquidity and transparency
- Leverage and low transaction costs
- Regulated and standardized contracts
Disadvantages:
- Potential for significant losses due to leverage
- Fixed contract sizes may not suit all traders
- Limited trading hours (CME hours)
The currency options
In options, the buyer has the option without being obliged to buy and sell assets at a specific price on the option’s expiry date, hence the name options. However, if this trader sold the option, then there is an obligation to buy or sell the asset at a specific price (strike price) on the option’s expiry date. They are traded on an exchange like CME.
Trading forex options may be a little challenging because there is a limit on market hours for some options. Also, they are not as liquid compared to other financial instruments.
Trading mechanics:
- Call options give the right to buy the underlying currency
- Put options give the right to sell the underlying currency
- Options have premiums (prices) that fluctuate based on various factors
- Traders can buy (go long) or sell (go short) options
Order types:
- Limit orders: Execute at a specific price or better
- Market orders: Execute at the best available price
- Spread orders: Simultaneously buy and sell different options
Trading strategies:
- Directional trading: Buy calls for bullish views, puts for bearish views
- Covered call: Sell call options against a long position in the underlying currency
- Straddle: Simultaneously buy a call and put with the same strike and expiry
Advantages:
- Limited risk for option buyers (premium is the maximum loss)
- Leverage and potential for significant gains
- Ability to take bullish or bearish positions
Disadvantages:
- Options have limited lifetimes and can expire worthless
- Less liquidity compared to other instruments
- Potentially high premiums for certain options
Currency exchange-traded funds
Currency exchange-traded fund or ETF provides ordinary individuals access to the forex market by managing funds without casting individual trades. It may be an exposure to a single or basket of currencies.
Financial institutions like banks buy and hold currencies in a fund then offer the fund shares to the public on and an exchange. Due to this, people can buy and trade shares like stocks.
In exchange-traded fund, there is also a limit on the market time. Also, ETFs charges commissions and transaction costs. People use ETFs to make forex speculations, diversify portfolios, or hedge versus currency risks.
Trading Mechanics:
- Currency ETFs trade on stock exchanges like regular stocks
- The fund holds physical currencies or currency derivatives
- Share prices fluctuate based on the underlying currency(ies) performance
Order Types:
- Market orders: Execute at the current market price
- Limit orders: Execute at a specific price or better
- Stop orders: Execute when the price reaches a specified level
Trading Strategies:
- Buy-and-hold: Long-term investment in currency ETFs
- Speculative trading: Buy or sell currency ETFs to profit from currency fluctuations
- Hedging: Use currency ETFs to offset currency risk in a portfolio
Examples:
- Invesco DB US Dollar Bullish Fund (UUP) tracks the U.S. dollar’s performance
- WisdomTree Chinese Yuan Strategy Fund (CYB) provides exposure to the Chinese yuan
Advantages:
- Easy access to the forex market for retail investors
- Diversification across multiple currencies
- Regulated and transparent structure
Disadvantages:
- Limited trading hours (exchange hours)
- Tracking error (fund performance may differ from underlying currencies)
- Fees and expenses associated with ETFs
Spot forex (Over-the-Counter Market)
The spot forex, also known as the over-the-counter (OTC) market, is an off-exchange market. It is massive, still growing, and the financial market is always open. There is no central exchange location or exchange, and a person directly trades with the other person. In short, spot forex is like a private agreement between two people through an electronic trading or phone calls.
Trading Mechanics:
- Trades are conducted through electronic platforms or over the phone
- No centralized exchange; transactions are bilateral agreements
- Trades are settled immediately or within a few business days (spot settlement)
Order Types:
- Market orders: Execute at the current market price
- Limit orders: Execute at a specific price or better
- Stop orders: Execute when the price reaches a specified level
Trading Strategies:
- Scalping: Opening and closing positions quickly to profit from small price movements
- Day trading: Opening and closing positions within the same trading day
- Swing trading: Holding positions for several days to weeks to capture larger price swings
Examples:
- Major currency pairs (EUR/USD, GBP/USD, USD/JPY) are heavily traded in the spot forex market
- Retail traders often access the spot forex market through brokers or online trading platforms
Advantages:
- High liquidity and 24-hour trading
- Leverage and low transaction costs
- Direct access to the interbank market
Disadvantages:
- Decentralized and less regulated than exchanges
- Potential for high leverage and significant losses
- Counterparty risk (rely on the creditworthiness of the other party)
Retail Forex
Retail Fx is like a secondary OTC market that helps traders with tighter budget access the forex market through forex trading providers. These forex trading providers serve as a representative in the primary OTC. Their job is to look for the best prices available and add markups before posting them on trading platforms.
Trading Mechanics:
- Traders open accounts with forex brokers or trading providers
- Brokers act as counterparties, quoting bid and ask prices for currency pairs
- Trades are executed through the broker’s trading platform or software
Order Types:
- Market orders: Execute at the current market price
- Limit orders: Execute at a specific price or better
- Stop-loss orders: Exit a position at a predetermined price to limit losses
- Take-profit orders: Exit a position at a predetermined price to lock in profits
Trading Strategies:
- Day trading: Opening and closing positions within the same trading day
- Swing trading: Holding positions for several days to weeks
- Scalping: Opening and closing positions quickly to profit from small price movements
Examples:
- Traders with smaller account sizes can access the forex market through retail brokers
- Popular retail trading platforms include MetaTrader 4 (MT4), MetaTrader 5 (MT5), and proprietary broker platforms
Advantages:
- Low capital requirements and leverage
- Convenient access to the forex market
- Availability of educational resources and trading tools
Disadvantages:
- Potential for high leverage and significant losses
- Counterparty risk (relying on the broker’s creditworthiness)
- Potential conflicts of interest between brokers and traders
Forex spread bet
The person does not own the underlying asset in the forex spread bet but speculates which direction the price will go. In short, forex spread bets allow a trader to speculate the future price direction of a currency pair.
Trading Mechanics:
- Spread betting firms quote bid and ask prices (spreads) for currency pairs
- Traders stake an amount per point of price movement (e.g., $1 per pip)
- Profits or losses are calculated based on the price movement and stake size
Order Types:
- Buy (go long): Bet on the currency pair’s price rising
- Sell (go short): Bet on the currency pair’s price falling
- Stop-loss orders: Exit a position at a predetermined price to limit losses
- Take-profit orders: Exit a position at a predetermined price to lock in profits
Trading Strategies:
- Trend following: Placing bets in the direction of the overall trend
- Countertrend trading: Betting against the prevailing trend, anticipating a reversal
- News trading: Placing bets around major economic events or news releases
Examples:
- Spread betting is popular in the UK and Ireland
- Major currency pairs like EUR/USD and GBP/USD are commonly traded
Advantages:
- Tax advantages (no capital gains tax in some jurisdictions)
- Potential for significant gains with leverage
- No requirement to own the underlying currencies
Disadvantages:
- Potential for significant losses due to leverage
- Limited to specific jurisdictions (e.g., UK, Ireland)
- Counterparty risk (relying on the spread betting firm’s creditworthiness)
Forex contract for difference or CFD
A forex CFD is a financial derivative wherein its products track an underlying asset’s price so that traders can make price speculation. A CFD’s price is a derivative of the underlying asset’s price. A CFD is a contract between a CFD provider and a trader. One of them agrees to pay the other the difference between the trade’s opening and closing in the security’s value.
Trading Mechanics:
- CFDs are traded OTC through CFD providers
- Traders can take long or short positions on currency pairs
- Profits or losses are calculated based on the price movement of the underlying currency pair
Order Types:
- Market orders: Execute at the current market price
- Limit orders: Execute at a specific price or better
- Stop-loss orders: Exit a position at a predetermined price to limit losses
- Take-profit orders: Exit a position at a predetermined price to lock in profits
Trading Strategies:
- Day trading: Opening and closing positions within the same trading day
- Swing trading: Holding positions for several days to weeks
- Scalping: Opening and closing positions quickly to profit from small price movements
Examples:
- Major currency pairs like EUR/USD, GBP/USD, and USD/JPY are commonly traded via CFDs
- CFD providers include brokers like IG, Plus500, and CMC Markets
Advantages:
- Leverage and low transaction costs
- Ability to take long or short positions
- No need to own the underlying currencies
Disadvantages:
- Potential for significant losses due to leverage
- Counterparty risk (relying on the CFD provider’s creditworthiness)
- Overnight funding charges for holding positions past the trading day
Read also! Ten Tips to Profit with CFD Trading
Risk Management
Risk management is absolutely critical if you want to survive and thrive as a forex trader. You can’t just blindly jump in without proper risk controls in place. One of the most important things is position sizing.
- Position Sizing: This one’s absolutely crucial. You never want to risk more than 1-2% of your account on any single trade.
- Stop-Loss Orders: These are life-savers. A stop-loss will automatically get you out if the market moves against you, limiting your potential losses. Use them religiously.
- Diversification: Don’t put all your eggs in one basket. Split up your risk by trading multiple currency pairs and strategies. If one position hits the fan, the others can potentially offset those losses.
Trading Psychology
Your mindset and emotions as a trader are absolutely crucial.
- Emotional Control: The market will play tricks on your mind. Fear, greed, overconfidence – you have to control those emotions. If you let them drive your decisions, you’re toast.
- Discipline: The best traders approach each trade rationally, without letting anxiety, euphoria or self-doubt cloud their judgment. Build an unshakable, disciplined mindset.
- The Full Package: Trading is as much a mental game as it is technical. Nail your psychology through experience, a solid trading plan, thorough analysis, and proper risk management. Get the mental side locked in, and you’ll have a massive edge.
Recommend trustworthy Brokers and Platforms
If you want to trade currency futures, you’ll need access to a major exchange like the CME. Most retail traders get set up through a futures broker. Some of the most well-known and trustworthy ones are NinjaTrader, AMP Futures, and Infinity Futures.
For forex options, Tastyworks and Thinkorswim by TD Ameritrade are two popular platforms that give you access to trade currency options on exchanges.
In the mood to try some currency ETFs? You can buy and trade those just like regular stocks through any major retail broker like Fidelity, Charles Schwab, or TD Ameritrade’s regular trading platforms.
Now if you want to get into spot forex, you’ll need a forex-specific broker. Some of the biggest names that are considered solid are Octa, IG, Exness, and Oanda. They give you access to trade spot forex pairs with leverage.
For those interested in forex CFDs, IG Markets and Plus500 are two of the best CFD brokers out there that are regulated and have a decent reputation.
And if you’re located in the UK or somewhere that allows it, providers like IG and CMC Markets are legit places to try out forex spread betting.
Just be sure to use a demo account first before putting real money on the line!
As a summary
These different ways are just a few of the many in which a trader can do forex trading. These ways can help traders be better at trading and bring home more profit. All a trader has to do is know the market’s ins and outs thoroughly and combine that with hard work and determination.
Glossary
CFD (Contract for Difference) – A derivative that allows speculation on an asset’s price movement without owning the underlying asset.
ETF (Exchange-Traded Fund) – A fund that tracks an asset or basket of assets and trades like a stock on an exchange.
Leverage – Using borrowed capital to increase investment exposure beyond available capital.
Hedging – Opening trades to reduce or offset risk from an existing position.
Day Trading – Opening and closing trades within the same trading day.
Swing Trading – Holding trades for days or weeks to capture larger price moves.
Scalping – Taking many small profits on small price movements.
Strike Price – The price at which an option can be exercised.
Option Expiry – The date when an option contract becomes null and void.
Market Order – An order to execute a trade immediately at the best current market price.
Limit Order – An order to execute a trade at a specified price or better.
Stop Order – An order that becomes a market order once a specified price is reached.
Liquidity – The ability to easily buy and sell an asset without impacting market price.
Spread – The difference between the bid (sell) and ask (buy) price quoted by brokers/dealers.