Opportunities in forex trading can be acquired not just by simple buy and sell transactions. Actually, you can make use of other mechanisms to your benefit; from Pending Orders to different kinds of financial contracts.

Transactions in forex market lasts for 24 hours from Monday to Friday. During that period, market players buy and sell currencies to fulfill their needs or just simply to take profit from speculations. Players on the market are governments around the world, companies, central banks, commercial and investment banks, brokers, and individuals like forex traders. It is a crowded market. And to fulfill the needs of those players that continue to improve with time, forex trading has evolved.

Long, long time ago, forex trading was done face to face between buyer and seller. They traded currencies directly at agreed price. However, for the last years we could trade indirectly through online forex trading. What we trade in the market, too, no longer straight currency, but also its derivatives.

In the previous article, we have introduced several market terminology to you. In this article, we are going to talk about mechanism of forex trading and the various contracts that have become instrumental in the market nowadays.

 

Mechanism of Forex Trading

In online forex trading, individuals conduct transactions through brokers. Transactions done all the time online in a certain trading platform provided by the brokers. The most widely used platform nowadays is Metatrader 4 (MT4). Individuals registers to a forex broker, then download and install the necessary platform, and then could start forex  trading with it.

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Generally, there are two kinds of order we can choose for each transaction, they are:

1. Instant Executions
Instant executions mean that the order (buy/sell) is done right then and there with the ongoing price.

 

2. Pending Orders
Pending orders refer to suspended orders, or orders that is only going to occur once it touches a certain price. There are four kinds of pending orders:

 

Buy Stop
Putting 'buy' order in a certain price that is above the ongoing price, with hopes that once price goes upward, it will touch that price and then continue to go up and beyond.

 

Sell Stop
Putting 'sell' order in a certain price that is under the ongoing price, with hopes that when the price oes downward, it will touch that price and then continue to go down and beyond.

 

Buy Limit
Putting 'buy' order in a certain price under the ongoing price, with hopes that the price will go down, touch that price, and then turn back up afterward.

 

Sell Limit
Putting 'sell' order in a certain price above the ongoing price, with hopes that the price will go up, touch that price, and then turn back down afterward.

 

Financial Contracts In Forex Market

Market players trade currencies in five kinds of contracts: spot, forward, swap, future, and option. The most common is spot. But advancement of financial market means that people discover more ways to trade currencies, such as the recent 'invention' of binary options.

 

1. Spot

Spot refers to transactions done to buy/sell two currencies with the most recent (ongoing) price. The currencies change hands right then and there. Ordinary online forex trading uses this kind of transaction.

 

2. Forward

With exchange rates changing almost too fast to be tracked, there are risk in being involved with import/export agreement. One way to deal with such risk is by using forward transaction. In forward, a buyer and seller make agreement to buy/sell currencies at a future date, but with the recent (ongoing) rate, no matter how the exchange rates would be in the future.

 

3. Swap

Swap is a complicated transaction involving exchanges of two currencies in a certain period through the mechanism of buying in spot date, selling in a future date (forward), and buyback with spot price.

 

4. Future

Futures are standardized forward contract that was created for the purpose of hedging among mutinational companies (MNCs). The main difference between forwards and futures is that forwards are agreements between two parties and can't be traded freely, while futures are available for trading in forex market.

 

5. Option

Option is one-of-a-kind market derivative in which the owner has the right to buy/sell a certain currency with another currency at a previously agreed price on a later date. What differ options from forwards and futures is that the owner of option has no obligation to go on with the contract, although he has the right to do so.

 

During the last five years or so, forex brokers have been offering Binary Options to be traded by forex traders. It was an innovation based on Option-styled contracts. The profit of trading such derivatives is said to be high. However, the risk is considerably higher too. You should be very careful if you decide to trade on any contract, and first ensure that you understand their characteristics enough before start trading.