Foreign exchange trading is a complex and dynamic field that requires knowledge of various types of trading. In this post, we will go over the 6 most popular types of foreign exchange trading to help you better understand what is forex trading and how it all works.
Forex trading is the most popular type of foreign exchange trading and consists of currency speculation. This means that traders are not interested in the eventual destination of these currencies but rather their movement from one country to another. The activities can be either up or down depending on whether a trader believes that the amount will continue to increase or decrease. Forex Trading involves buying (going long) or selling (shorting) a particular currency pair with an understanding as to how much it should move before you close your position; hence: forex trading.
Types of Foreign Exchange Trading:
- Spot Trading
Spot trading is the most basic type of foreign exchange trading and entails buying a particular currency when it is quoted at one price, then selling that same amount back to the market as soon as you are able. You can also sell your spot position before the original expiration date if you believe it will lose value significantly during those days; for example: if there’s strong speculation about a stock and its rate jumps 15% in two weeks.
Arbitrage is a popular type of foreign exchange trading that entails buying and selling similar assets in two different markets simultaneously. This allows the trader an opportunity to capture profits from small price differences between these same items, or as most often occurs, currencies.
- Isolation Trading
Isolation trading is similar to the spot trade but involves holding on to a position for an extended period to profit from fluctuations. What this means is that you buy and sell currencies at one price, then hold onto them until they reach a certain pre-set target before selling back into the market – usually within 90 days.
Hedging is a type of foreign exchange trading that entails taking out an opposite position to offset possible losses. This means that if you are holding onto USD but feel as though it might lose value, then the most popular way to hedge would be by buying EUR, essentially ensuring your investment will not go down below zero no matter what happens with either currency.
- Arbitrage with Derivatives
Arbitrage with derivatives is a type of forex trading that can be conducted on either stocks or foreign currency futures. This means that you buy two assets at different prices simultaneously and then close the trade when one reaches your target price.
- Cross Currency Arbitrage
Cross currency arbitrage is a type of foreign exchange trading that entails buying and selling the same asset in different markets. This means that you will purchase an asset on one market and then sell it in another for-profit – even if there’s not much of a price difference