What is Forex Spot Trading
With forex spot trading, one can make significant short-term profits by trading at prevailing prices. It is the fastest way to trade currencies and is traded instantly. Mastering a spot trade requires regular practice, and once learned, it helps traders benefit from the constant demand and supply of the currency pairs in the market. In our article, we will learn everything about forex spot trading and its strategies.
What is spot trading in forex?
Spot trading in forex refers to buying and selling a currency pair in real time. The currency pair is traded at the spot price, which is the current market rate, leading to instant delivery of the amount of the currencies in your trading account. Since currencies cannot be physically delivered to you or your account, the price associated with the currency pair bought/sold is debited or credited.
Benefits of spot trading
- The spot market is heavily traded and has high volumes of currency pairs being bought and sold. This leads to tight spreads, which helps traders maximise returns.
- Spot positions do not ever expire and can be executed as per the trader’s requirement. This also means that the trading charts are continuous and help in the historical analysis as charts from the past many years can be monitored to understand price movement.
- When trading a currency pair where the interest rate of the bought currency is higher than the interest rate of the sold currency, traders receive a small amount of interest credit into their accounts every day. This amount is the difference between the interest rates of both currencies.
- Since spot trading refers to buying and selling at the current time, it is useful for short-term traders and reaps short-term profits, which, when combined, gives a significant level of profit altogether.
- Spot markets are the most liquid markets making trades less risky than markets that are not so liquid.
- You can trade forex spot orders with a margin, which means that you can set the level of maximum loss you are willing to take on the trade and avoid significant losses.
- The spot market is highly transparent, as you can look at the currency pair prices being traded publicly in real time.
Types of spot markets
Over the counter: Over-the-counter or OTC markets are off-exchange trading markets. Assets bought or sold at the OTC market are not exchanged formally like a forex trading platform. Instead, both sellers and buyers meet on an open exchange platform to trade with bilateral agreements. There is no third-party supervision involved. The selling or buying price is not necessarily published anywhere. Hence, different dealers receive different prices, and trade occurs as per best interest. Market exchange: Market exchanges are formal and organised marketplaces where buyers and traders meet online to trade. Such marketplaces like the forex trading platform ensure that prices are transparent and regularised, which means you cannot provide different rates to different sellers.
What is a spot contract?
A forex spot contract refers to an agreement between the trader and the forex trading platform. The trader agrees to buy or sell a currency pair at the current exchange rate in this agreement. The transaction is settled immediately on the spot date, which is generally two business days after the trade has taken place.
Important elements of spot trading
Going long or short
You can buy or sell the forex spot market by buying and selling currency pairs at the same time. Go long and buy a pair when you see the base currency increasing more than the quote currency. This will assist you in trading along with the uptrend and making profits accordingly. If you see that the quote currency is increasing more than the base currency, you can place short orders and benefit from the falling markets.
Trading with a currency pair
When trading with the forex spot market, you trade a currency pair and not a single currency. This means you buy one currency while selling another. If you are buying the base currency and selling the quote currency, this means that you believe that the base currency is going to strengthen against the quote currency and vice versa.
Speculating with lower spreads
Day traders or short-term traders are the ones who mostly trade a forex spot market. This is because the spreads are lower, and the cost of the transaction is less when you close the trade on the same day. However, if you keep a trade open overnight, you do have to pay overnight funding charges, but they are also minimum with forex spot markets.
Orders types in a spot trade
A market order refers to the type of order executed at the prevailing market prices as soon as you place the order. Market orders can be placed as long orders in rising markets and short orders in falling markets.
A limit order refers to the type of order that is placed with a specific limit price. It is not executed as immediately as a market order and only takes place when the market price touches the limit price. Hence, you can place a limit order to buy at lower prices and sell at higher prices than the current market prices.
A stop limit order refers to the type of order having both stop and limit prices. It allows you to set the minimum profit amount and maximum loss amount you are willing to incur on a trade. The limit order is executed automatically when the trade reaches the price mentioned.
Trailing stop order
A trailing stop loss order refers to the type of order where you can place a pre-set order which is a certain percentage below or above the current market price. This helps you profit from market swings, limiting losses and protecting gains if the market moves against your predicted direction.
One cancels the other order
A one cancels the other order refers to an order that is a combination of a stop-limit order and a limit order. Two orders are placed simultaneously, but the one that is triggered first is executed, and the other is cancelled. This helps you place two orders with different prices, both suiting your trading needs and receiving the price that is triggered first.
How to settle a spot trade?
Forex spot trades are delivered within two business days after placing a trade order. The only exception in the settlement of spot trades is the USD/CAD transaction, which is mostly always settled on the next business day. The demand and supply of the currency pair create the current price, known as the spot price. This is the price at which the trade takes place. Then, pending orders are immediately filled as new ones are placed. This makes the spot price change every second in the market. When you place an order, there is an agreement between you and the other party about the amount of one currency that will be exchanged for another. You also decide the rate of exchange mutually, and once the transaction value of both currencies is agreed upon, along with the settlement date. The currencies are then delivered to the bank accounts within two business days. If you place multiple orders on a single day, the net gain or loss is settled on the settlement date.
Example of a spot trade
Let us assume that you want to trade USD/GBP. Since the USD is in a continued uptrend right now and GBP is falling, you decide to exchange GBP to buy more of the USD. The current asking price of buying USD is 1.3, and you expect it to reach 1.7 as the trading day ends. Hence, you buy one more unit of USD by selling 1.3 units of GBP. The order will be executed at the price of 1.3, and your account will be debited for an additional unit of USD, whereas it will be credited for 1.3 units of GBP in real-time. A new long position will open for USD, and the transaction will be settled within two business days. If USD continues to rise and finally reaches 1.7, you will make a profit of 0.3 in the forex spot market.
How to initiate spot trading in forex?
1. Gather information about the currency pairs
Analyse different currency pairs in the market and select the ones you would like to trade. You can read their historical price charts to understand their future projections and make a decision accordingly. You can pick from over 80 currency pairs.
2. Decide on the spot market
Forex can be traded in a spot market or as forex forwards and options. Make sure that you are well versed with forex spot trading and how it works.
3. Choose the right broker
Find a leading forex broker in Australia and select the one that matches your trading requirements and strategies the best. You should examine the benefits, spreads, and costs offered by the broker before making a decision.
4. Open an account
Once you have selected the broker you want to trade the forex spot market with, open a forex trading account.
5. Define a trading plan
Make a spot trading plan where you mention your trading strategies, objectives, risk appetite, and more. Ensure that this trading plan is with respect to spot trading and caters to the forex spot market. You can also mention the spreads at which you are going to prefer trading and stick to the same.
6. Find the right market opportunity
After analysing the current market movements, find the right opportunity to either enter a long trade in a rising market or short trade in a falling market. You can use technical indicators and signals to monitor current market movement and its impact on future market movement.
7. Place an order
After you have decided on the currency pair you want to trade with, select the currency you want to buy and place the market order at the current spot prices.
8. Place stop and limit orders
Place stop and limit orders to minimise loss potential and control risks. You can mention the maximum loss you are willing to incur, which will ensure that your trade does not go beyond that particular limit.
9. Monitor the market
Keep a close eye on the spot market and monitor the price movements. You can apply technical indicators to the price chart and analyse future price predictions. Exit the market when the trade starts moving against you and enter when it moves in your preferred trading direction.
10. Exit the trade
In spot markets, you generally exit the trade on the same day to avoid overnight charges. If you feel that the trading day ends and the currency pair is reaping your profits, you can exit the trade and lock in the short-term profit.
Trade the forex spot market for short-term gains today
Spot markets ensure that you trade in a 100% transparent environment and find the best deal in real time. You can start trading the forex spot market today by signing up with us and using several technical indicators, price charts, and available tools. Sign up for a live trading account or try a risk-free demo account on Blueberry Markets.
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