Spot Forex Trading

The forex market is a huge market with tons of different opportunities, features, advantages and risks.  As a forex trader there are many ways to trade currency.  You can trade forex spots, forex options and forex futures and each offers unique challenges and rewards.  The difference between each forex instrument may seem small and subtle, but the difference is there, and it will affect your strategy.

There is often some confusion over what exactly the difference is between these instruments and how it affects the trading process.  In this article we will look at spot forex trading as opposed to futures forex trading.

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You may know futures from other parts of the financial world.  Commodity futures are very popular with some traders. Take oil futures for example.  These futures are traded both for profit and as a hedge for producers.

Currency futures are traded for the same reasons, either to offset future risk or to speculate.  A future is a legally binding contract for a trade to take place in the future, hence the name.  When two parties agree to a future contract, they obligate themselves to either buy or sell a currency at some point in time for an agreed price today. 

Futures were originally meant as an instrument to be used by producers and consumers to agree upon a price for a physical product, but today they are used in many cases solely as speculation, where there is no actual exchange of the underlying asset.

A spot fx or spot forex trading is where the underlying asset is immediately transferred following the trade.  When you go to the bank to exchange currency you are in effect trading on the spot fx market as you receive your currency straight away.  The main difference between spots and futures, is that with a future, the price is agreed upon at day 1, but the actual exchange takes place at another time in the future.  With the spot, the price is also determined at day 1, but the actual exchange of the asset takes place either immediately or shortly after the contract is signed.

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Spot trading was originally only used by big corporations that needed fast delivery.  Banks would make money from the spread of the transaction.  Then over time, spot forex trading became available to the general retail trader.

Today, the market for spot forex trading is huge and has been the subject of tremendous growth rates. Spot fx trading appeals to traders because of the lower costs of transactions.

Futures are subject to the fees of the National Futures Association (NFA).  The direct costs are therefore lower, but some of the difference is offset by higher spreads.

Spots are also popular because it's possible to buy smaller lot sizes than with futures which are usually 100,000 units. Spots have therefore become popular among new traders with less risk tolerance.

Forex spots can be traded with most brokers and software systems.

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