Spot Trading in Forex

This trading is one of the two options and the one which offers traders the flexibility. There are two styles within the spot trading too. They are the traditional option and then the SPOT option which stands for Single Payment Option Trading.

The traditional option let the buyer purchase a contract to buy the required number of lots at a time and price of mutual choice. This is slightly different from the stock market where the opted lots are always bought and sold on standard settlement cycles. This is follows the over-the-counter nature of trading of forex. When option expires and the set price is not attained, the buyer only pays the options seller the premium which equals the difference between the expiration and options price. If the price hits the set price, buyer gais the lots and can sell them off for profit in the cash market. The premiums payable to the options seller is a little higher here than that of the SPOT trading contract.

Single Payment Option Trading- SPOT
SPOT trading is pretty simple and straightforward. The seller offers a price scenario; say for example EURO/USD will cut through a particular price within a specified period and seeks price offers. If the price break comes through, the seller immediately gets cash deposited into his account.

SPOT trading is especially attractive to traders because of the advantages inherent within it.
1. You stand to get the cash if your call is right otherwise you loose only your premium.
2. SPOT offers a number of different choices and not just one fixed to opt for unlike in traditional options trading.

But Why Traders Prefer SPOT?
Out of the appealing reasons some of them are listed out here.
1. Your downslide is protected to the limit of your premium which is the paid up value of the lots.
2. Payment needed to make is lighter than the cash market.
3. The biggest advantage is the freedom to set the prie and expiration date.
4. Traders can hedge the SPOTs against cash positions and minimize risk
5. When you anticipate fundamental changes to a currency you need not put at stake your entire capital to enter into open positions.

There are certain downsides for SPOT trading in forex too without which I suspect everyone would be trading SPOT market rather than cash market.
1. Premium is a function of strike price and date so the risk /reward ratio is variable
2. You can't change mind midway and trade the SPOT options unlike traditional options or cash market, so predicting exact price and date could be risky.

When entering into positions keep in mind the time function as longer periods load higher premiums.

Article By : Jason Uvios

Forex Trading Information

How to Identify Trending in Forex Trading

Currencies tend to trend more and fluctuate less violently unlike stocks which behave pretty much the different way. The reason for this is not hard to understand. Currencies trend depending on the countries' foreign and economic policies which are macro economic in nature and the currency pairs take fairly long enough time to react to any change in policies. Where as stock movements are more or less determined by microeconomic factors and market sentiments.

Euro/US Dollar: On Par at the Beginning
When Euro was brought into force its exchange rate was set officially at 1 USD a Euro. At that time there existed hardly any difference between the economies of US and the European Union. US had a GDP of $11.0 billion and European Union was pretty up close there at $10.5 billion. While US economy was growing at a good rate of above 3% per annum Europe was a bit sluggish and recorded slightly over 1.5%.

Gradual Shift In Favor Of Euro
But this was not coming in the way of Euro's gradual march ahead of US Dollar. Look at other key economic factors for yourself. US had a deficit budget and the balance of trade was negatively skewed against US while the European Union had some of the seriously good parameters in exact contrast to that of the US's. The trade balance sheets looked healthy and strong standing on the near equal GDP.

During this period India, China, Russia and Brazil were making big strides in economic growth and Europe was gaining position in their trade partnerships shifting the forex currency in Euro's favor. At a time when their reserves were growing by leaps and bounds, US Dollar was sliding continuously which contributed to the conversion of their reserves into Euro, but partially.

How Does The Market React To This?
Euro/USD is by far the biggest forex pair which accounts for $1 trillion every trading day. With so many changes in the world economic scenario and the notional trades in between the two currencies still commanding 1/3rd of the currency market, the US dollar trended constantly over the years.

The firm trend may not be apparent in short term price charts but a relatively long period chart such as 2-3 years would clarify Euro's constant gain against USD. Till recently cross currency payments were, say for Japanese payments to Germany, first by converting Yen into USD and then USD into Euro. Now such a necessity doesn't arise for payments.

All these things mean that the trends are going to continue for long unless there is a strong reason.

Article By : Jason Uvios

Foreign Exchange Market