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- International (ENG)
In this article, we explain what a forex spot contract is and how this differs from a futures contract. You can begin trading these types of cash products using CFDs and spread bets by opening an account and accessing our platform, which has a market-leading forex offering of 330+ currency pairs, the largest in the industry*. Keep reading to learn how FX spot markets work and how it differs from trading forex forwards or futures.
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FX spot is an agreement to trade currencies at the current rate, or cash rate, through a broker. Traders may make a profit or loss based on the difference between the prices they buy at and sell at. In this 24-hour market, there are opportunities to trade and profit whether prices rise or fall.
An FX spot contract is one in which the trader agrees to buy or sell at the current exchange rate. Going to the bank before a trip to the US and exchanging British pounds for US dollars is an example of a spot currency transaction. Currencies are exchanged at the prevailing rate.
The same concept applies to other markets, like commodities. Gold, for example, can be purchased on spot, meaning paying the current rate to receive gold now.
FX spot is also known as the cash market, and on our trading platform, we call spot currency pairs “cash”. We will discuss this further on in the article.
A forex forward or futures contract has an expiry date and gets settled at some future date. For example, buying a GBP/USD forward contract locks in a price now, but the contract states the currencies won’t be exchanged until the expiry of the contract.
There are no overnight credit or debits for forwards or futures because the interest rate differential of the currencies in the pair is factored into the price paid for the contract. The price of a forward will therefore be different from the cash price.
Futures and forwards may have higher spreads than spot FX, since they are not as heavily traded due to expiry dates and the price difference from spot.
Futures and forwards are extremely similar. Futures trade through an exchange, while forwards trade off-exchange. At ALFATRADING-MARKETS, we offer forward contracts but not futures, and we also offer cash instruments that are based on spot FX prices, which we will explore below.
On our Next Generation trading platform, we use cash prices that traders can spread bet or trade CFDs on, so they are speculating on the price movements of the currency pair, rather than purchasing it outright.
An FX spot transaction is a rolling transaction. Rolling means the transaction is not allowed to settle, which would require delivering the currency sold and receiving the currency bought. Since traders aim to profit on the difference between when they buy and sell, and may not want the own the physical currency, positions are rolled for convenience.
Since the currencies are not physically exchanged, holding the position overnight will result in a daily credit or debit depending on the interest rates prevailing in the currencies being exchanged. These are called overnight holding costs. Interest rates are set by the central banks of each country/zone.
Positions are also rolled because of leverage. Traders can use leverage to trade on more currency than they have in their account, as they don’t have to physically exchange the currency they are buying or selling. We offer between 20:1 and 30:1 leverage on most currency pairs, including major, minor and exotic crosses.
Assume you want to spread bet the GBP/USD currency pair.
The current asking price is 1.3525 and based on your trading strategy, you believe it will go higher. You buy at 1.3525 and choose how much you want to risk per pip of movement. If you risk £1 per pip, each time the price moves one pip, up or down, you will make or lose £1.
If the price rises to 1.36, the trade will make a profit of £75 (75 pips x £1). If the price drops to 1.35, the trade will make a loss of £25 (25 pips x £1).
Traders can control when they cut losses and when they take profit with stop-loss and take-profit orders. Optionally, you can fill in the prices for these orders when you make a transaction by clicking the buy or sell button on a currency pair.
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What is FX spot futures arbitrage?
Spot futures arbitrage is when a trader believes there is too great a price discrepancy between the spot price and the price of a forward or futures contract. If they believe the prices will converge again, they can potentially profit. This involves buying or selling at the spot price and then creating an opposite transaction in the futures or forward market. As the prices converge, the trader closes both positions, hopefully with a profit if they are calculated correctly. Learn more about arbitrage strategies.
What are some strategies for trading FX spot?
Harmonic patterns and other chart patterns are commonly used. Some traders focus on trading trends, while others use mean reversion strategies. Others use technical indicators and price action strategies. Browse an overview of some of the most important and effective trading strategies.
What is the difference between FX spot and FX swap?
Whereas the aim of spot forex is to trade the value of one currency against another, a forex swap focuses more on interest rate differentials. Learn more about currency swaps.
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Disclaimer: ALFATRADING-MARKETS is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by ALFATRADING-MARKETS or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
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