Forex Spot Trading A Simple Guide!

Forex Spot Trading - A Simple Guide!

What is Forex spot trading?

Spot Forex trades are very short term trades on the Forex markets. The term 'spot' is believed to come from the term 'on the spot' (abbreviated to spot) representing the time period for 'settlement' of a foreign exchange transaction, usually no more than two working days.

Forex spot trading, therefore in its simplest form is the short term, short settlement delivery of traded currencies.

Spot traders take advantage of price variations in currencies and do not generally take positions in the market longer than on a same day basis. Most spot conditions are settled within minutes of a trade. However, spot trading in its truest sense shouldn't be confused with scalping.

The method that traders use to trade the Spot currencies differ according to whether trading is done on an 'interbank' basis or whether it's done on personal account (usually leveraged trades). Interbank spot traders will set up their book to run a short or long position depending on where their intra day view of the market is and then they will trade the spreads trying to maintain that position.

What this effectively means is that the interbank dealer is making money on the buy/sell spread if he's a market maker in that currency while at the same time looking to square his/her position at the appropriate time.

However, many spot traders will trade the movements on a square book and just 'job' the currency. This is usually done when there is uncertainty in the market. The beauty of spot trading is that the trader does not get stuck in a bad trade.

Traders who trade personal account can trade spot through their Forex broker. However personal account traders can and often do hold positions for longer than a day which takes them out of the realm of spot traders as their position now becomes an open position that is usually covered by a 'forward' ( forwards will be explained later in my course). The vast majority of personal account traders will usually day trade but it is useful to be aware of the exceptions.

What currencies are spot traded?

There are 7 major currencies traded these are the USD, GBP, CHF (Swiss Franc), CAD, AUD (Australian dollar), JPY and EUR. Each currency is traded as a pair for example GBP/USD, USD/CHF, AUD/USD. The reason for this is simple - if you have JPY and you want to buy USD then you have to sell 105 JPY to get 1 USD - hence the USD/JPY (dollar yen) rate is 105.00.

I have tried to give you some basic information on the operation of the Forex markets. If you want to learn more about Forex spot trading and many more aspects of the Forex market.

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