Dear Client,

Warmly reminds you that the component stocks in the stock index spot generate dividends. When dividends are distributed, VT Markets will make dividends and deductions for the clients who hold the trading products after the close of the day before the ex-dividend date.

Indices dividends will not be paid/charged as an inclusion along with the swap component. It will be executed separately through a balance statement directly to your trading account, the comment for which will be in the following format “Div & Product Name & Net Volume ”.

Please note the specific adjustments as follows:

The above data is for reference only, please refer to the MT4/MT5 software for specific data.

If you’d like more information, please don’t hesitate to contact cs@vtmarkets.com.

Understanding leverage trading

What is leverage in forex? Leverage trading is a way to increase your exposure to market forces when you deal in foreign currency pairs. The forex market works according to laws of risk and reward — the greater the risk, the greater the potential reward. Therefore, the higher the leverage rate, the higher the potential return. However, this also increases the potential loss.

When you leverage a forex trade, you essentially borrow capital to supplement your money. Forex currency pairs move in pips — pips in forex are minimal price movements, so un-leveraged positions can only result in small profits and losses. By borrowing additional capital for leverage, you increase how much each pip movement is worth.

For example, if you trade with a leverage of 1:10, you are borrowing $10 for every $1 you put forward, and each pip is worth 10x the amount it would be without leverage. You will still need to pay this $10 back once you close your trade, which will be taken out of the profits of a successful position. You’ll need to pay this amount back if your position fails. This is why traders must be cautious and ensure they take the time to learn forex techniques before extending the leverage on their positions.

Calculating the leverage ratio

Leverage is generally represented as a ratio — for example, 1:10. The number on the left of the ratio represents the money you will put forward from your capital. In contrast, the number on the right represents the proportion you will borrow. With a 1:10 trade, you can use $100 of your own money to control a position of $1,000. With a 1:100 trade, this $100 will allow you to control a position with $10,000.

It’s important not to get carried away with leverage trading. Stick to your strategy, and only choose a leverage ratio you feel comfortable with. Don’t be tempted to push the boundaries, and stick to manageable levels of risk.

How to trade with leverage

The key benefit of forex leveraging is the profit potential, but you need a strong strategy if you are to stand a chance of realising this potential. This means understanding your risk tolerance and how much you are willing to borrow on your trade. Next, you’ll need to select a currency pair that best suits your strategy and choose a leverage ratio that aligns with your targets. Once these preliminary steps are complete, you can start to trade with leverage.

• Put protective measures in place

Before opening your forex position, you need to have some protective measures. These tools will help you maintain a sustainable approach to trading and ensure that your position remains within strict parameters. The main tools you will use take profit and stop loss, and you may use these with other forex trading techniques such as FX futures. 

• Take profit

Take profit will automatically close the trade once a certain profit level is reached. With forex trading, mainly leverage trading, you are not simply trying to achieve the maximum level of return from each position. Instead, you want to ensure that your profits remain within your broader strategy. This tool helps ensure your profits don’t reach unsustainable levels and you stay on track for long-term growth.

• Stop loss

Stop loss works the same way as taking profit but in the opposite direction. This tool enables you to set a loss limit. If your position struggles and falls to this limit, it will automatically be closed, and you will absorb the losses. The tool ensures that losses do not become unmanageable and helps you keep within the initial strategy’s limits.

• Open your position

Once you have chosen your leverage ratio and set your take profit and stop loss tools, you can open your position based on the current spot trading price. Open a buying position if you believe the currency pair’s value will increase, or open a selling position if you think it will fall in value. You should have a strategy for how long you expect to keep the position open.

• Close your position

When you reach your predetermined endpoint for the position, you can close it. This means the position is no longer exposed to market forces, and you will take any profits and absorb any losses incurred while it remains open. You now need to pay back the capital you leveraged on the position, whether you made a profit or not.

Begin your forex trading journey at VT Markets — trade FX forwards and other derivatives

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FAQs

What is a good leverage in forex?

It’s difficult to say what is a good level of leverage in forex simply because this is a personal choice for individual traders. A good rule of thumb for traders is to start small and work exclusively with manageable leverage levels. While increasing your leverage allows you to achieve greater profits, it also increases your exposure to risks and losses.

If you are new to trading with leverage, you should use 10:1 leverage as an absolute maximum. This means you put $1 of your capital forward and use leverage to borrow $10. Consider using lower leverage when you are starting or unsure, but never exceed this level.

What is 1 to 500 leverage?

1 to 500, commonly represented as 500:1, is a very high leverage ratio. In this example, you borrow $500 for every $1 you put forward from your capital reserves. While this is great if your trade is successful, as you are essentially multiplying your profits by 500, it exposes you to a very high level of risk. Even if you opened trade with only $10, you would need to borrow $5,000 to use as leverage, and this $5,000 will need to be paid back whether the trade is successful or not. This means if your trade fails, you could find yourself in a significant amount of debt.

This rate of 1 to 500 is typically the maximum level of forex leverage traders are permitted to use. Most traders will not open positions with this sort of leverage.

Can I use leverage in forex as a beginner?

Anyone can use leverage when they trade forex. However, it’s essential to understand that forex significantly increases your trade risk. As noted above, beginner traders should keep their rate of leverage low and manageable, limiting their exposure while they get used to this trading technique.

Using a demo account is even better for beginners wondering how to trade forex with leverage. With a demo account, you can practice using leverage just like an actual trade, except there is no risk because you are neither putting forward any money nor borrowing any. You can’t make a profit from a demo account, but you can learn valuable techniques that will help you further down the line.

Is it possible to trade forex without leverage?

Yes, it is possible to trade forex without leverage. You can put forward your own money without borrowing or leveraging any additional capital. This reduces your risk exposure but also reduces your exposure to profits. Traders who do not use leverage will have to make massive amounts of successful trades or put forward a high level of capital before they start to make significant profits.

With this in mind, most traders use little leverage when they trade. As they get more accustomed to using this, they can gradually increase their risk profile to increase profit potential. Of course, there are no guarantees, and even experienced traders can lose money when leveraging. Other forex strategies, such as OTC derivatives like FX forwards, do not always require leverage, although traders do have the choice of opening a structured leveraged forward contract.

How do I reduce risk when trading forex with leverage?

It is possible to manage and reduce risk while leverage trading. The most effective way to reduce risk is to keep the leverage ratio low. If you are leveraging at 5:1, you stand to lose considerably less money on a failed position than if you were leveraging at 20:1. Traders are always looking for the sweet spot of optimal risk exposure without trading in an irresponsible and unsustainable fashion.

Another way to reduce risk is to grow your experience slowly over time. Get used to trading on a demo account and then practice leverage trading with live positions, using small amounts of leverage at first as you develop your understanding. This helps to foster a sustainable approach to this trading strategy.

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Understanding pips in forex

Pips in forex are the incremental price movements of currency pairs on the foreign exchange market. The term is an acronym for “price in percentage” or “percentage interest point”. When the price of a currency pair moves up or down, the extent of this movement is measured in pips, which are represented on the interface of your trading platform dashboard.

One pip is generally a tiny amount and worth far less than a single dollar and even less than a single cent. Despite this relatively small scale, pips are very important to traders — traders are working with such acceptable margins that they must remain aware of even the most minute price movements. These movements are instrumental as traders plan their strategies and examine their open positions.

Different definitions of trading pips

Trading pips can be defined in different ways. This is because the idea provides a valuable metric for traders examining the movements of the currency pairs. For currencies with tiny denominations, a pip may be defined differently to currencies with larger denominations.

For most currency pairs, a pip will be a movement at the fourth decimal place. The example of the AUD/GBP currency pair — comparing the Australian Dollar as the base currency and the British Pound as the quoted currency — this might be represented as 0.5768. So one Australian Dollar is worth 0.5768 British Pounds. If this value rises to 0.5769 or falls to 0.5767, this would be a movement of one pip.

But putting the pip at the fourth decimal place may be too precise in some cases. For instance, in the AUD/JPY pair — the Japanese Yen is the quoted currency; the Yen is a currency with tiny denominations, so we need to define a pip differently. With this currency pair, a pip would be found at the second decimal place, as a movement at the fourth decimal place is too small to provide any actionable insight.

Alternatively, some traders may want to view price movements in even greater detail. For example, they may decide to look at pipettes rather than pips — this means adding another decimal place to the reading. So, in the instance of the AUD/GBP pair — and most other pairs — a pipette will be at the fifth decimal place, ten times smaller than a pip. In the example of the AUD/JPY pair, the pipette will still be ten times smaller than the pip but will be found at the third decimal place.

How pips work with forex derivatives

Forex traders can use different techniques and strategies to approach the foreign exchange market. While all of these strategies, techniques and fx derivatives are different in their ways, they are united by one key aspect — all rely on price movements measured in pips. Take a look at how pips are used across these different forex strategies.

• Pips and forex futures

When traders use forex futures contracts, they agree to buy a predetermined amount of a set currency at a locked-in price. Futures traders can use forex pips to examine whether or not the contract was the right choice, based on the price movement, although they will still be obliged to make the trade at the end of the contract period.

• Pips and forex forwards

Forwards are similar to futures in that they are obligated to complete the trade and involve predetermined currencies, set periods, and locked-in prices. However, they are not traded on the exchange platform and are sold OTC (over the counter) via a broker. Traders will assess the success of the forward contract by examining price movements measured in pips.

• Pips and forex options

Again, options involve predetermined factors such as currency type, time duration, and a locked-in purchase value. However, there is no obligation to complete the trade at the end of the contract period. With this in mind, traders will use pips to decide whether or not they should go through with the trade when the contract expires.

• Pips and forex swaps

With a forex swap agreement, parties agree to trade one currency for an equivalent value of another over a set period. Interest is paid on the trade, and the transaction is reversed at the end of the agreement period. Pips are essential for analysing the progress of the trade, as well as for planning future swaps.

• Pips and forex spot trading

Spots are not derivatives but an essential aspect of forex trading. Engaging in spot trading means opening positions based on the current value of a currency pair. Analysing pips helps traders to understand potential market movements as they decide whether or not to execute a spot trade.

How pips work with forex leverage

Pips are vital when it comes to using leverage in forex trading. When traders use leverage, they borrow capital to supplement their money. Traders can choose to use only a small amount of leverage, or they can leverage at a higher ratio, significantly increasing their exposure to market forces.

For example, a trader may choose to leverage a trade at a ratio of 10:1. This means that for every $1 they use to open the position, they borrow $10, achieving 10x the exposure. At 20:1, this rises to 20x, and so on. When leveraging, traders can potentially experience increased profits multiplied by the magnitude of the leverage ratio. However, the potential losses are multiplied too, so leveraging should be handled with extreme caution.

So what does this have to do with pips? Trading on leverage magnifies everything, including pip values. While a single pip movement may only result in a tiny profit or loss on an un-leveraged trade, leverage multiplies this value. At 10:1, each pip is worth 10x as much; at 100:1, each pip is worth 100x as much. Generally, these increases are limited at 500:1 — usually, the maximum amount of leverage permitted on a trading platform.

Pips and beginner traders

When beginners learn how to trade FX currency pairs, they will need to get used to the interface they are using while also growing their understanding of the tools and indicators necessary to execute trades. Pips are among the first things beginner traders will have to do.

As traders become more confident, they can use advanced indicators and tools to forecast future movements in the forex market. While these indicators and tools cannot guarantee future successes — and traders of all experience levels can suffer losses in the market — they help develop a more sophisticated and diverse strategy. However, traders need to know how to read and analyse pips to get to this point. Forex tickers and graphs are all based on information provided by these pips.

This is why demo accounts are so helpful as individuals learn how to trade forex. With a demo account, traders can get used to looking at incremental price movements and analysing the direction of these movements over time — all in a risk-free environment. As no money is changing hands, there is no potential for profit when using a demo account, but there is no potential for losses. This makes demo accounts a vital asset for traders starting on their journey.

The benefits of understanding forex pips

Gaining a solid understanding of pips provides many different benefits to forex traders. Learn more about some of the essential advantages: 

• Quick and reliable insight

Perhaps the most significant advantage of understanding forex pips is gaining immediate insight. Forex price changes happen quickly and are delivered in real-time. As a result, traders need to be able to check their platform’s interface and understand these changes at a glance, and pips are a big part of this.

• An understanding of past price movements

Pips also give traders the ability to view and understand past price movements. These price movements do not guarantee future movements in the same direction, but they help traders make informed predictions.

• A more knowledge-based approach to leverage

Leverage effectively magnifies the impact of minute pip movements. Therefore, understanding pips is crucial for traders seeking to get the most out of their leveraged positions.

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Key advantages of forex trading

As traders learn more about the forex market, and as they start to use the tools and features of their platform in an effective way, they can begin to realise a number of genuine advantages of forex trading. It’s important to remember that advantages are not guarantees, and there is no such thing as an infallible forex strategy. Despite this, there are many benefits of forex that are not necessarily found in other types of market trading.

High levels of liquidity 

Liquidity is a major benefit of trading forex. The forex market is one of the most liquid and volatile financial markets in the world, which means traders have the potential to quickly make profits on their positions. Even short-term scalpers and day traders can make profits in the market, provided that their strategies are effective and their predictions are correct.

Of course, this liquidity means the market can quickly move in the opposite direction too. There is no way to completely eliminate risk in this market, and even the most experienced traders may suffer significant losses.

Flexible trades across different market conditions

An important advantage of trading forex is the potential to make a profit even across different market conditions — although it should be noted that profits are never guaranteed, regardless of past market performance. 

Traders can decide to go long on a trade, which means they open a buying position in the anticipation that the value of a currency will increase over time. If this value does in fact increase, they will receive a profit. Alternatively, traders can open a selling position — also known as going short — if they expect that the value of the currency will fall during their trading window. If their prediction is correct, they will take a profit.

This enables flexible trading whether the market is growing or declining, giving traders more choice. There is always the risk that the market will move in the opposite direction, however, and traders should act cautiously and conservatively when they approach the FX market.

Relatively easy access to the market

It certainly takes time and effort to learn how to trade forex effectively, and traders 

should be willing to research and grow their experience in the long term, but it is still relatively easy to start out trading FX. This important benefit of forex trading can be easily achieved with a trading platform’s demo account.

With a demo account, users can access all of the tools and features that are available on the trading platform. They can view performance data, analyse the market in real-time, and make practice trades as part of their education and development. There is only one difference between a demo account and a live trading account — the risk. With a demo account, there is no risk, as no capital is required. This means there is no potential for profit, but no potential for losses either.

Traders should use the demo version of the platform to familiarise themselves with the forex environment. After they have grown confident in the market, they can graduate up to a live account and begin trading for real.

The ability to increase exposure through leverage

While changes happen quickly in the forex market, and currency prices change on a second-by-second basis, these movements tend to be small in the short term. When traders open their positions only for a short time, their market exposure is low — which means their potential profits and potential losses will be low too. 

It is possible to increase this level of exposure through a process known as leverage. Leverage in forex basically means to supplement the trader’s own capital resources with borrowed capital. This enables the trader to control positions worth far more than their own resources will allow — a significant forex benefit for experienced traders. 

Leverage is generally presented as a ratio. For 10:1 leverage, $10 is borrowed for every $1 taken from the trader’s own capital, and the trader controls a position worth 10x the amount they would have controlled otherwise. The leveraged capital will need to be paid back whether the trade results in a profit or not, which means traders need to take great care when using leverage.

The potential to build a diverse trading strategy

One of the reasons why forex trading has become so popular is its potential for diversity. Traders have a wealth of different choices at their disposal when they approach the FX market. These include the following:

• FX options

An FX option is a contract that locks in place a set currency value for the duration of the trade. Once the contract reaches maturity, the trader has the option to complete the transaction, giving this derivative its name.

• FX futures

FX futures are similar to options in that the currency value is locked in place for the duration of the contract. The futures derivative is a standardised contract traded on an exchange, and the trader is obliged to complete the transaction once the contract reaches maturity.

• FX forwards

FX forwards also lock in a currency value over a set period of time, and — like with FX futures — there is an obligation to complete the transaction at the point of maturity. However, unlike futures, these derivatives can be customised to meet the needs of traders.

• FX swaps

With an FX swaps derivative, there is still a time element, but the trade is executed at the beginning of the time period. A set amount of one currency is exchanged for an equivalent amount in another currency, and interest is paid on the trade. At the end of the swap period, the exchange is reversed.

• FX spot trading

Spot trading is not an FX derivative, as it is based solely on the current market value of the currency in real-time. However, spot prices provide some of the underlying data to the forex derivatives listed above. 

Quick and straightforward insight with experience

As traders grow their experience and become familiar with using their forex platform’s dashboard, they can begin to achieve insight and understanding at a glance. With an intuitive and clearly presented interface, the trading platform will provide real-time information on the performance of currencies in the foreign exchange market. This in turn helps users to unlock numerous trading benefits as they develop into confident traders.

FX price movements are measured in pips. Pips in FX are small movements at the fourth decimal place of the currency value — or at the second decimal place in the case of quote currencies with a smaller denomination, such as the Japanese yen. Reading these movements, and analysing previous movements in the marketplace, gives users the opportunity to maximise the forex trading benefits they encounter.

A huge range of different currencies and currency pairs

As well as diversity in trading styles and derivative types, there is also diversity to be found in the currencies themselves. Currencies from all over the world are found on the forex market, and traders will be able to take advantage of this as they open and close positions.

From major pairs like AUD/USD (bringing together the Australian Dollar and the United States Dollar) to less commonly traded pairs like the EUR/TRY (the European Euro and the Turkish Lira), the forex market represents a wealth of potential for traders.

The chance to trade around the clock

The trading day is finite, and there are opening and closing times — for instance, the market will be closed at the weekend. However, during the week the market is open 24 hours a day. As forex is of global interest, trades are always being made. Even in the middle of the night in Australia, the European and American markets will be experiencing daytime trading rushes. 

This means the liquidity discussed above is an ever-present feature of the market during the trading week. Users often find this a useful benefit of trading forex, as they can build their strategy around their own schedule.

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How to trade forex: A beginner’s guide

Getting started in the forex market can be daunting, and traders may feel unsure of how to grow their understanding and develop their skills. Following a few simple steps can help traders to begin, although all would-be forex traders should recognise that this is a gradual process — sustainable and responsible trading requires care and caution, even among more experienced individuals.

Set up a trading account

Traders will need an account on a trading platform as they learn FX. This platform will provide the charts and tools required to analyse the market and will also offer the functionality required to open and close trades. The trader will also be able to manage their capital balance via this platform, adding and withdrawing funds when required.

Use a demo account to understand market movements

The trading platform will include a demo account, and traders are advised to use this demo version as they learn how to trade forex. The demo account is risk-free as there is no capital involved, which means no potential profit and no potential loss.

Analyse pips

When the value of a currency pair moves up or down, this movement is measured in pips. Pips in FX are incremental movements, usually at the fourth decimal place — and sometimes at the second decimal place for quote currencies with smaller denominations. While past performance does not guarantee future success, pip movements can help traders as they forecast which direction the market will travel in.

Choose a strategy

As individuals learn to trade forex, they will need to adopt a strategy and stick to it. Forex decisions are always strategic and will need to be aligned to a predetermined target, so traders will have to decide whether they are going to adopt a very short-term scalping strategy, a short-term day trading strategy or a longer-term approach. Short-term trading has smaller returns but also involves less risk.

Select a currency pair

With the strategy defined, traders can choose which currency pair they want to trade with. They will refer back to their strategy and their pip analysis as they decide this — a scalping strategy requires a currency pair exhibiting swift price movements, while longer-term strategies are more suited to currency pairs displaying consistent, aggregate growth over time.

Protect against losses

Traders can use stop-loss features that will automatically close the position if losses reach a certain level. This helps to keep the trader on track and within the bounds of their predetermined strategy. Take-profit tools are also useful here, as these will close the trade once a specified profit level is achieved — again, this helps to keep trades sustainable.

Decide on leverage ratios

Leverage in FX essentially involves borrowing money to supplement the amount of capital put forward. This is expressed as a ratio — in the example of 20:1 leverage, the trader borrows $20 for every $1 they commit from their own capital reserves. Exposure is increased, which means a greater profit potential, but also a greater risk of loss. Because of the increased risk, beginners should keep leverage low when they learn how to trade currencies on the forex market — inexperienced traders should 

never go beyond 10:1 leverage. They may use an even smaller ratio.

Open the position

Once everything is ready, the trader can open their position based on the current spot trading price, represented in real-time on the platform’s dashboard. They can open a buying position if they expect the value of the currency pair to appreciate — also known as going long — and can open a selling position (going short) if they expect it to fall in value. Ongoing analysis of price movements in pips, as well as the take-profit and stop-loss features, will help to make sure the trade remains sustainable.

Close the position

When the trader decides the time is right, they can close their position. Once the position is closed, the trade is no longer subject to rises and falls in the market, and the trader will take any profits and absorb any losses that have occurred while the position was open.

Different types of forex derivatives

Above, we’ve looked at what traders need to do as they open and close positions on the forex market. This is designed to be a relatively simple rundown of how you can make trades on the market, but there are other techniques and trade types that you may decide to incorporate into your strategy as you develop your skills.

• Forex forwards

With forex forwards, individuals can customise a trading agreement with another party. They will set the currency to be traded, the trading price (which will be locked in for the duration of the contract) and the time period for the trade. These are OTC — over-the-counter — contracts, which are customised and traded via a broker.

• Forex futures

FX futures are similar to forwards in that there is a set price, a set time and an obligation to complete the transaction. The difference is the customisability — futures cannot be customised and are instead traded on the exchange according to a standardised set of rules and parameters.

• Forex options

Forex options work in a similar way to futures and forwards — they are executed with 

locked-in pricing and across a set time period. However, there is no obligation to complete the transaction at the end of the time period.

• Forex swaps

With forex swaps, two parties agree to exchange equivalent amounts in different currencies. Each pays interest on the currency trade, and then the swap is reversed at the end of the agreement phase.

The benefits of forex trading

Trading forex provides a number of advantages for individuals, although it is important to always exercise caution during trading, as there are risks involved. Take a look at some of the main benefits of forex.

• Traders can access the market with low levels of capital investment

It does not take huge amounts of capital investment to access the forex market. Traders can open and close positions with only small investments, and they can choose to leverage trades to increase their exposure if required. Leverage in forex significantly increases risk, however, so traders should bear this in mind.

• Risk can be managed effectively

Stop-loss and take-profit tools help individuals to manage risk when trading forex. In addition to this, a conservative approach to leverage and proactive monitoring and assessment of market performance can further reduce the risk traders face. Remember that risk can never be eliminated completely, and there will always be an element of danger in the market.

• There is a relatively easy learning curve

Traders can learn how to trade forex quickly and easily, developing a more sophisticated strategy as their knowledge grows. A demo account is also useful for anyone who wants to learn to trade forex in a risk-free environment.

• Traders achieve exposure to a liquid market

Forex values can grow and fall very quickly, and the market is a volatile one. This is a good thing for traders, as it means there is a potential to make profits quickly, even on very short-term trades. Of course, this is a double-edged sword as traders may also experience losses.

• It’s possible to trade even when a market is in decline

When trading forex, it is possible to go long (to open a buying position) or to go short (to open a selling position). This gives traders an element of flexibility, as they have the potential to make a profit whether the market is moving up or down. However, it’s important to remember that predictions are not always accurate, and there is always a risk of loss.

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Understanding forex future contracts

A forex future contract — also known as a currency future because it involves the relative values of international currencies — is a method of trading in the foreign exchange market. Traders essentially agree to complete a transaction, purchasing an amount of one foreign currency in exchange for an equivalent amount of another.

The trade is not carried out straight away. Instead, the contract establishes a period of time, after which the transaction must be executed. This is an obligation, and there is no way for a trader to change their mind once the contract is enacted. The contract will also specify the exchange rate, which will be locked in for the full length of the contract.

Movements in the exchange rate will be measured in pips. Pips in FX are incremental changes in price and can be in the upwards or downwards direction. If the trader is buying currency, they are hoping that the price will move upwards, as this means they are essentially buying this currency at a cheaper, earlier rate.

FX futures contracts are traded via forex exchanges, and they are standardised. This basically means that the contract parameters are predetermined ahead of time, and the trader simply chooses which contract they wish to use. The trader cannot make any changes to this contract or alter its terms and conditions.

The forex futures contract in more detail

We have already looked at what a futures contract is and what it does, but let’s examine it in more detail. Each contract includes the following information:

• The size of the contract — Represents the value of each currency in the futures contract. This value will be standardised, so it cannot be amended or customised.
• The rate of exchange between the two currencies — This is defined at the current spot trading level and locked in for the duration of the contract.
• The date of maturity and expiration — This is also known as the date at which the contract comes to an end and the deadline for settling the trade.
• The contract’s maintenance margin — The minimum level of funds that a party must hold in their account to be able to service the contract.

This last point, the maintenance margin, may require further explanation. The idea of the maintenance margin is simply to ensure that there are enough available funds to complete the transaction at the end of the contract period. This protects the other party in the event that money is withdrawn from an account or if funds are depleted for another reason.

Difference between FX futures and spot trading

Unlike spot trading, FX futures are derivatives. In other words, the value of the trade is derived from the underlying data. Spot trades are not derivatives, as they depend only on the current value of the currency, represented in real-time via the forex platform’s interface. This is the key difference between the two forms of trading.

Forex futures are contracts with a number of different parameters. They relate to a specific currency traded on the forex market, in the same way that spot trading does, but this is where the similarities end. With futures contracts, there are also pricing parameters and duration parameters — the contract will be active for a set period of time, and the value of the currency will be locked in for this time period. This removes some of the uncertainty of trading.

Difference between FX futures and other kinds of derivatives

We’ve established that a forex futures contract is a currency derivative, but it is not the only type. When trading on the forex market, there are several other derivative choices to consider, each of which is different from an FX futures contract in its own specific way.

• FX futures and FX forwards

Forwards are arguably the most similar derivative to futures. Both forwards and futures involve currency values that are locked in for the duration of the contract, and both carry an obligation that the trade be completed once the contract reaches maturity. The difference lies in the customisation of the contract. Forwards are sold over the counter via a brokerage service and can be customised to meet the individual needs of traders. Futures, on the other hand, are standardised and are sold via exchanges — they cannot be customised or altered.

• FX futures and FX options

The main similarities between futures and options are the time component and the locked-in value. In both cases, the current spot price of the designated currency will be fixed for the duration of the contract. The main difference is that there is no obligation to complete the trade on an options contract, whereas the futures contract must be executed.

• FX futures and FX swaps

In forex, swaps are an agreement to exchange an amount of one currency for an equivalent amount of another currency. Interest is paid on the currency amounts and the trade is reversed once the contract reaches its endpoint. This set duration is the main similarity between swaps and futures, but the two derivatives are inherently different in almost all other ways.

The benefits of forex future trading

There are a number of benefits of forex future trading that can make this type of derivative an attractive choice for those seeking to profit from their trade or use the forex market in another way. Bear in mind, however, that advantages and profits are not guaranteed, and there is always an element of risk when you are working with something as volatile as the forex market.

Forex futures represent an easy access point to currency derivative trading

As forex futures are standardised, it is relatively easy for users to learn how to trade forex derivatives. This is different from a forex forward, for example, that will need to be customised — futures traders simply select the contract they wish to use in their trade. It still takes time to develop a strong trading strategy, but beginners may find the learning curve to be gentler than with other forms of derivatives.

Futures contracts provide an element of certainty and predictability

The terms of the futures contract are set ahead of time, so there are no potential changes over the course of the contract’s duration. This provides an element of certainty and predictability — two things that can be difficult to find in the typically volatile foreign exchange market. It’s important to remember that this is not a guarantee that the trade will be successful, but at least the trader knows that the value of the currency is locked in while the contract is valid.

Standardisation improves transparency

When traders open a futures contract, they know exactly what they are getting. They can see the currency they will be working with, they know precisely how long the contract will be open and they know exactly what currency exchange rate will be applied. All this information is immediately available and cannot be changed, so there is no ambiguity or uncertainty for traders.

Futures have a diverse set of use cases

There are a number of different use cases associated with FX futures. One of the simplest is simply to access a required amount of foreign currency at a future date, without running the risk of an unfavourable exchange rate further down the line. Other use cases include speculation — the trader agrees to buy a set amount of foreign currency in the expectation that the value will have appreciated by the time the contract expires — and hedging.

In hedging, the trader takes out a futures contract to offset potential losses in other trades, creating a robust and sophisticated trading strategy. Finally, futures may be used to analyse and assess exchange and interest rates affecting different currencies while remaining protected against sudden price movements in the short term.

Futures can be leveraged to increase exposure

Without leverage, small value movements on the forex market may not translate to significant profit for the trader. Leverage in FX effectively increases the trader’s exposure to these price movements, and in turn, increases the potential return. Of course, this also means the potential for loss is magnified too, which is why traders should use leverage with extreme care and keep leverage ratios low while they are still learning forex.

Trade forex futures with an award-winning broker

At VT Markets, we provide an award-winning, industry-leading platform to help traders of any levels reach their goals and secure their rewards. With our client-first approach, low trading costs, and leverage of up to 500:1, we help them make the most of the forex futures market. The combination of the best tools and a trader-friendly experience makes VT Markets the right broker for you. Open a demo account today and contact us to learn more!

Understanding forex options: options explained

A forex option is a derivative — in other words, its value is derived according to data taken from the forex market, including the real-time currency exchange rates and the forecasted changes. When traders use FX options derivatives, they are entering into a contract that enables them to buy a currency at a predetermined rate and at a pre-agreed date in the future. Because these derivatives deal in currencies on the foreign exchange market, they are sometimes referred to as currency options.

There is no obligation to complete the transaction once the contract reaches its date of maturity. Instead, traders have the option to complete the transaction if they so wish and if the transaction remains in line with their strategy. This gives the option derivative its name. 

If the trader decides they do not want to go through with the transaction, they would only lose the amount they paid to purchase the derivative — which is known as the FX option premium. While this limits the amount of risk the trader is exposed to, it should be noted that the cost of an option’s premium can be high, and so trading should be approached with caution and with a foundation of research.

When traders open FX option contracts, they are able to customise the agreement. This is because options are not standardised and sold via the exchange but are instead traded on an over-the-counter (OTC) basis through brokers. Traders can choose the contract duration and exchange price based on their own needs, as well as on the current spot trading currency value — the exchange price will be fixed for the full term of the contract.

FX options and pips

While the exchange rate is fixed for the duration of the contract, the real exchange rate will be subject to fluctuations. This is how traders decide whether or not to execute the trade once the contract reaches the point of maturity. Traders will examine these rate changes as they learn how to trade forex.

For example, if the exchange rate remains the same, the trader will lose only the cost of their premium. If the exchange rate falls, the trader will lose more money if they decide to execute the transaction, and so they may decide to turn down the option and lose only the premium cost. 

If the exchange rate rises, beyond the set rate and exceeds the premium cost, the trader will have made a profit. If the exchange rate rises but does not cover the premium cost, the trader has made a small loss. Some traders may decide to execute the transaction even at a loss if they expect the rate to rise again in the future — this requires careful forecasting.

But how are these rate movements measured? Rate movements are measured using pips in FX, and traders will need to be aware of these pip fluctuations while they trade. A single pip is a movement at the fourth decimal place of a currency value in most cases, and at the second decimal place to quote currencies of smaller denominations, such as the Japanese yen.

The differences between forex options and other derivatives

Other than the currency option, there are other derivatives available, and traders will need to familiarise themselves with the differences as they learn forex trading techniques.

• FX futures and options

Both FX futures and FX options are opened for a set period of time and dictated by a contract. Futures are standardised and sold via an exchange, and the trade must be completed according to the terms of the contract. This is different from the FX option, where traders are not obliged to complete the transaction at the end of the options contract.

• FX forwards and options

In a fundamental sense, the difference between FX forwards and options is explained according to the obligation to execute the transaction. Forward trades must be completed according to the contract, while an options trade does not necessarily have to be completed. Forwards are different from futures in that they are sold over the counter (OTC) via a forex broker and can be customised to meet the needs of the trader.

• FX swaps and options

Forex swaps involve the exchange of a set amount of one currency for an equivalent amount of another currency. Interest is paid on the currency values, and the exchange is generally reversed at the end of the swap period. This is inherently different from an options contract, as funds are exchanged — either nominal or actually changing hands — at the beginning of the swap agreement, while any trading on an option contract is executed at the end.

The benefits of FX options trading

Through proper research, traders can unlock the many benefits of forex options. Take a look at some of the most important.

Reduced risk compared to other derivatives

There is always a risk when trading in the forex market, but FX options provide a way to limit this risk. As there is no obligation to complete the trade once the contract reaches maturity, there is no danger that users will be stuck with an unsuitable trade. Instead, they can simply choose not to execute the transaction, and absorb the premium cost of the trade as a loss. This is very different from other forms of derivatives, such as FX forwards and futures, which will need to be executed, increasing the risk to the trader.

Useful for hedging 

One of the most common use cases for options in forex is hedging. When traders open a currency position in the forex market, there is always the risk that the currency pair value does not move in the direction the trader anticipated. This can result in a significant loss, particularly at higher levels of leverage. Leverage in FX essentially means borrowing capital that is used to supplement the trader’s own reserves, allowing control over a far more valuable position. With increased leverage comes increased opportunity for profit, as well as increased risk.

To mitigate this risk, traders may decide to hedge their position. A hedge is a trade in the inverse direction to the open position. So, if the position falls when it was expected to rise, a trade in the opposite direction can recoup some or all of the losses. 

Options are useful in this regard, as there is no obligation to complete the transaction. If their original position was successful, the trader may decide to abandon the options contract and cover the premium cost with their profits. If the position is unsuccessful, they can decide to execute the option to protect themselves. Traders should remain aware that even with a hedging strategy in place, there are no guarantees in the forex market.

The opportunity to profit from future movements in the market

FX options give traders the opportunity to profit from future movements in the forex market. By analysing past performance and by staying engaged with geo-political and economic developments, traders can forecast which way they believe the market is heading in. With this forecast, they can open up options trades that could potentially be profitable — without needing to commit to the trade in the same way they would with a future or forward contract. Even with the most rigorous approach to forecasting, there is no guarantee that the market will move in the expected direction.

Customisability for traders

Traders can customise their FX options contract. This means they can tailor the agreement to meet their own specific needs and requirements. In this sense, options are similar to OTC forwards but different from standardised FX futures.

Develop your forex options trading strategy at VT Markets

Here at VT Markets, we are committed to providing traders with the tools, features and interface they need to develop their trading strategy and work towards their longer-term targets. This includes features that support FX options trading. 

Whether you are just starting out on your forex journey or you are looking to expand your trading skills with new capabilities, the VT Markets platform can help you do precisely this. Set up your demo account and practice using VT Market’s tools and features in a completely risk-free environment. Then, move on to a full trading account and execute trades for real. 

Want to learn more? Reach out to our team directly.

Trade with an award-winning broker

At VT Markets, we provide an award-winning, industry-leading platform to help traders of any levels reach their goals and secure their rewards. With our client-first approach, low trading costs, and leverage of up to 500:1, we help them make the most of the market. The combination of the best tools and a trader-friendly experience makes VT Markets the right broker for you. Open a demo account today and contact us to learn more!

Understanding spot trading

Spot trading involves a real-time assessment of current prices in the foreign exchange market. When an individual makes a spot trade, the value of the currencies they are working with is based on these real-time price movements — i.e., the currency value at the exact moment a trade is made.

As forex is a highly volatile and liquid market, these values can change quickly. Often, the value of two currencies in relation to one another will vary by the second, which is why careful reading of market movements is required for successful trading.

Traders may decide to go long when they open a position in the forex market. This means essentially buying a currency at the current spot price, expecting it to increase in value. The trader may decide to keep this position open for just a few minutes or seconds (known as scalping), for a few hours (known as day trading), or for longer, depending on their strategy. The opposite of going long is to go short, which means opening a selling position — traders choose this approach if they believe the currency value will fall in relation to the current spot price.

The benefits of forex spot trading include access to a highly liquid market, a relatively straightforward trading technique, and the opportunity to increase exposure via leverage. However, just because the strategy has its advantages, this does not mean results are guaranteed — traders still need to take steps to mitigate risk in the market.

Spot trading and pips

When individuals research and execute an FX spot trade, they need to be able to measure the movements in the market. This is where pips come into play. Pips in forex are incremental movements of price — which can be in the upward or downward direction depending on current market forces.

Generally, a pip is a movement at the fourth decimal place of the currency value — a minimal shift or up or down that is worth less than a single cent to traders. In some cases where the denomination of a currency is very small, a pip may represent a price movement at the second decimal place. 

While these pips are small, they are critical to understanding the forex market. Once a spot trade has been executed, pips are used to measure the subsequent movements of its value, which will tell the trader whether or not their trade has been successful. Traders need to remember that positions move up and down regularly, so they need to view the aggregate progress of the currency value to understand their trade better. 

For example, a day trader may see their position fall multiple times over the course of the trading day. Still, its overall value will increase as long as the upward movements outweigh the downward movements. Only scalper traders will need to focus on individual pip movements on a second-by-second basis.

Spot trading and leverage

As we’ve just seen, a spot transaction is based on the current price of a currency, represented in pips. While these pip movements are very small, traders can maximise the exposure they experience in the market through a process known as leverage. When they increase their exposure in this way, traders have the potential to receive a significant profit from their transactions. However, increased risk comes with increased exposure, and traders are in danger of severe losses when using leverage.

Using leverage in forex means borrowing capital to supplement the trader’s own capital. So, a trader may leverage a position at 10:1 — for every $1 they use to open the trade, they borrow a further $10. In this example, the trader can control a position worth 10x the value of an unleveraged position. In relation to spot trading, the transaction is still based on the current spot value, which is multiplied by the amount of leverage involved. The leveraged capital will need to be paid back at the end of the trade — this will be taken from the trader’s profits if the position is successful or paid back in another way if the position is unsuccessful.

The difference between spot trading and forex derivatives

When traders develop their forex strategy, they choose between several different derivatives. Spot trading is not a derivative — the value of a currency pair is based on the real-time pricing of the currencies involved. A derivative is a trading instrument derived from underlying forex data. FX options and swaps are examples of derivatives.

Take a look at the key differences between spot trading and derivatives.

• Spot trading and FX futures

An FX future is a contract that is traded across the exchange. This is a standardised instrument with predetermined parameters, and the contract will lock in the current spot trade value for the duration of the future. After this point, the spot trade value will change but the value of the future will not. Once the futures contract reaches maturity, the trade will need to be executed.

• Spot trading and FX forwards

FX forwards are similar to futures and lock in the current spot trade value 

for the duration of the contract. The difference is that forwards are sold over the counter (OTC) and can be customised to meet the individual needs and expectations of the trader.

• Spot trading and FX options

FX options also use the current spot trade value and lock this value in for the duration of the contract. The difference between options, forwards and futures is that options do not carry an obligation to complete the trade at the end of the contract duration.

• Spot trading and FX swaps

FX swaps involve trading an amount of one currency for an equivalent amount of another currency, based on the current FX spot trading value. Interest is paid on the trade, then the trade is reversed at the end of the swap duration. This differs from futures, forwards and options because the currency is exchanged straightaway when the contract is enacted.

Spot trading for beginners: a how-to guide

How do traders get started with FX spot trading and learn FX techniques? Take a look at our step-by-step guide to controlling positions and building a strategy.

1. Open a trading account

Spot trades will need to be executed via a brokerage platform. This means traders will need to set up an account on their chosen platform before they can begin analysing prices and opening positions.

2. Use a demo account to build experience

Beginner traders should use their platform’s demo account to grow their experience. The demo account provides a risk-free practice environment where no money is exchanged. This is a necessary step for anyone learning how to trade forex.

3. Define a strategy

FX spot trading decisions should not be made with haste. Instead, they should adhere to a predetermined strategy. Traders should decide ahead of time whether they want to open a short-term position, such as a scalping or day trading position, or adopt a longer-term focus.

4. Analyse price movements

While spot trading is based on real-time pricing data, price movements and trends define whether or not the trade is successful. Traders should analyse the progress of spot trading values over time as they identify the ideal currency to trade.

5. Put protection in place

Before the trade is opened, it’s essential to put protective measures in place. Stop-loss and take-profit features will automatically close the position if the currency value strays outside set parameters — both effectively ensure a sustainable and responsible trading strategy.

6. Open the position

With everything in place, the trader will open their position based on the current spot value of the currency. While the trade is open, traders should continue to analyse price movements to assess its progress and chances of success.

7. Close the position 

Once the trader feels the time is right, they can close their position. This means they will take any of the profits produced by the trade and absorb any of the losses accrued if the trade is unsuccessful.

Enjoy spot trading with VT Markets

VT Markets helps you reach your highest earning potential. As a leading broker, VT Markets gives you tightest spreads and advantageous leverage offerings of up to 500:1. Combined with all the best tools, you can start perfecting your trading strategy to reach your highest earning potential.

If you still want to figure out just how spot trading works, you can open a demo account to practice risk-free, until you’re ready to graduate to a full trading account. Contact us to find out more!

Understanding FX forwards

An FX forward is a method of trading on the forex market. To use a forward, the trader enters into a contract to execute the position at a predetermined rate once the contract reaches its expiration point. This enables traders to set a price for future trade and then speculate on future price movements. When the contract is due, the trader is obliged to complete the transaction according to the terms of the contract.

As the forwards contract derives its value from an underlying currency pair — i.e. two currencies traded against one another, such as USD/AUD (United States dollars against Australian dollars) — it is known as a derivative. 

However, forex forwards are a specific type of derivative. Other derivatives, such as FX options, have unique rules and attributes, setting them apart from a forex forward contract. 

Derivatives add variation and diversity to a trading strategy. Traders can use different types of derivatives to achieve different aims in the market. But it’s also important to understand that these derivatives add complexity, so traders must recognise what they deal with when they take out a derivative contract like an FX future.

A forex forward can also be known as a currency forward. This is simply because these forward contracts deal with the price movements of different currencies worldwide.

The difference between FX forwards and FX futures

Different types of forex derivatives work in various ways. FX options, for example, do not carry an obligation for the trader to execute the trade. This makes them fundamentally different from FX forwards, in which the trader must carry out the transaction at the end of the contract period.

Perhaps the closest derivative type to the forward contract is the FX future. Forwards and futures share several similarities:

• Both forwards and futures involve locking in a transaction price for a set period.
• Both types of derivatives carry an obligation to complete the transaction — i.e. the trade must be executed when the contract expiration point is reached.
• Market forces govern both derivatives within the foreign exchange ecosystem, so price movements can be significant and rapid. In other words, there are no guarantees of success when trading, and there is always an element of risk involved.

Despite these similarities, FX forwards and futures are inherently different.

• FX forwards are over-the-counter (OTC) derivatives, which means they are not sold on the exchange itself — instead, they are traded via an agreement between two individuals.

• FX futures are sold across the foreign exchange platform and form part of the platform’s built-in trading features.
• FX forwards can be customised to suit specific needs and requirements. The two parties can discuss the terms and conditions of the forward as part of their agreement.
• FX futures cannot be customised and are instead standardised. This is because they are traded across the exchange, and individuals cannot change the terms and conditions within.

The benefits of forex forwards

There are several benefits to forex forward trading. However, traders must remain aware that “benefits” are not the same as “guarantees”. Careful and conservative trading is vital to get the best out of your forex strategy, and you should work to minimise risks wherever and however you can. With the right approach, traders can enjoy the following benefits when they use forward contracts.

Flexibility and customisability

Perhaps the most obvious benefit to a forward contract is its flexibility. Traders can set the time period that best suits them and agree upon a price that matches their own strategy and view of the market. This is because the forward contract is an OTC derivative and is defined wholly according to the respective parties’ needs in the trade — unlike forward futures that are standardised. As a result, traders looking for a way to diversify and customise their derivatives may find FX forwards very interesting.

Usefulness in hedging

The foreign exchange market is volatile, and prices are subject to change. Therefore, if an individual wants to speculate on a currency at the current FX spot trading price — i.e. the value of the currency at any given moment — but needs to defer the execution of the position until a later date, they risk losing out. This is because the currency’s value could change significantly between now and the execution point. 

Changes in forex are measured in pips — pips in FX are incremental price movements that can travel up or down, depending on the performance of one currency in relation to others. Despite the gradual nature of these movements, pips can quickly build up and translate to significant value changes over time. This can cause a high level of risk and uncertainty for individuals who want to execute a trade at a future date. With FX forwards contracts, the trader can reduce the risk by locking in the current spot price and completing the trade when the contract expires, without worrying about price movements.

Simple and straightforward 

FX forwards are generally straightforward to understand. This is because there are only two main parameters — the duration of the contract and the price of the currency — and the only other variable is the currency itself. This means it is relatively easy for traders to utilise and execute forwards contracts after only a short time spent learning the mechanics of the forex market.

Can be used to maximise exposure

As traders grow their understanding of how to trade forex, they can begin to increase their exposure. Increasing exposure essentially means working with a higher level of risk in the hope of a higher reward. By increasing the duration of the FX forwards contract, traders can potentially achieve a better return. However, this also increases the risk involved, as there is more opportunity for the market to move in the opposite direction. This idea of increasing exposure is similar to that of trading with leverage in FX, although the two strategies work differently.

Trading FX forwards

There are a few steps traders will need to take when utilising FX forward contracts in their own strategy.

Deciding that FX forwards are right for you

FX forwards are particular derivatives and may not be suitable for everyone. For example, traders may prefer the exchange-traded aspect of an FX future contract or the more open-ended features of FX options. Consider your own targets and strategy before you make your choice.

Choosing a trading focus

Many traders utilise forex forwards to diversify their trading strategy or to hedge against other positions. Other traders may use FX forwards as their primary or exclusive trading strategy. Make sure you are clear on your personal approach before you begin trading.

Beginning the trade

FX forwards trades will need to be conducted along with a second party. This is because the contract is an OTC derivative and is not a standardised instrument sold via an exchange. However, brokerage platforms like VT Markets can help you connect with opportunities to make your FX forward trade. Via a broker, you and the second party will agree on the terms and duration of the contract, and the forex forward trade will be opened.

Closing the trade

Once the completion date of the contract is reached, you will be obliged to complete your trade. Unlike with other types of derivatives — such as FX options — you will not be permitted to change your mind.

Trade with an award-winning broker

At VT Markets, we provide an award-winning, industry-leading platform to help traders of any levels reach their goals and secure their rewards. With our client-first approach, affordable commissions, and leverage up to 500:1, we help them make the most of the market. The combination of the best tools and a trader-friendly experience makes VT Markets the right broker for you. Open a demo account to test our trading accounts risk-free. Contact us to learn more!

Understanding forex swaps

What are swaps in forex? A swap in forex trading occurs when two parties opt to loan one another an amount of a specific currency. Party A will loan a designated amount of one currency to Party B, and Party B will loan an equivalent amount of a different currency back to Party A. Both parties will pay interest on the amount of currency they have received.

Each party will need to agree on an exchange rate. This is based on the current forex spot trading rate — i.e., the exchange rate at the present moment — but the final agreed amount is likely to be above this value, factoring in predicted changes throughout the trade.

The actual loan amount does not necessarily need to change hands during a forex swap. While an agreed principal amount will be used to derive the interest that needs to be paid on the loan, this principal amount may not need to be transferred between the two parties. 

Generally, if the principal is not transferred, the forex swap will be a ‘fixed for floating’ swap. This means the two parties will pay interest based on the currency’s actual interest rate. The interest rate can increase or decrease over time, affecting the amount the recipient of the currency needs to pay.

In other cases, however, the full principal amount will be exchanged, and interest will be paid on top of this. At the end of the swap agreement, the exchange of the principal will be reversed, and each party will have their initial currency value returned to them.

When the principal amount changes hands, this is usually executed as a ‘fixed rate’ swap. Interest rates are paid at the levels that apply at the beginning of the swap agreement. This rate does not change, and interest is paid at this consistent level for the entire exchange duration.

Forex swaps and leverage

Leverage in forex is something that traders need to be aware of, as it is a significant part of the market process. This concept involves borrowing additional funds via a brokerage platform, which are then used to supplement the trader’s capital reserves. 

Trading leverage is represented as a ratio. A leverage ratio of 20:1 means that the trader is borrowing $20 for every $1 of their own capital they use to open the position. This allows traders to control a position 20x the value their own capital would otherwise allow — translating to 20x the profits if the trade is successful. Movements in currency prices are measured in pips. A pip in FX is an incremental move at the fourth decimal place of the currency value or the second decimal place in the case of smaller denomination currencies such as the Japanese Yen. These single pip movements are minimal, so the trader does not stand to gain or lose much from each one — with leverage; however, these movements are magnified by the order of the leverage ratio.

The loan amount will need to be paid back — plus interest — regardless of whether or not the transaction is successful. This is why traders need to be very careful with leverage, as their losses can be significant.

Traders cannot use leverage when they carry out a forex swap. Leverage is used for other types of trading, usually when opening buying or selling positions on currency pairs in the hope of a profit. Instead, leverage relates to FX swaps in a different way. When traders use leverage, they expose themselves to the swap interest rate. This is because they are borrowing capital to supplement the trade, and this borrowed capital carries an interest rate, as mentioned above. Users pay interest on their leveraged trade in the same way swap traders pay interest on the capital they receive.

Differences between forex swaps and other forex derivatives

You can view an FX swap can as a forex derivative. This is because the value of the swap agreement is derived from underlying data taken from the foreign exchange market. There are several other types of derivatives that traders can choose from as they learn more about the forex market, and swaps are different to these derivative types in many ways.

• FX swaps and FX futures

An FX future is a contract to carry out a transaction at a predetermined time. For the duration of the contract, the exchange rate is locked in and cannot move up or down — similar to the way an interest rate may be locked in with regard to a fixed rate swap. However, the transaction is not executed at the beginning of the trade but is completed at the end of the contract period, making swaps and futures fundamentally different. 

• FX swaps and FX forwards

An FX forward contract is very similar to a future contract. Both involve locked-in exchange rates and set time periods. The difference between the two derivatives is that futures are standardised contracts sold over an exchange, while forwards are not standardised and sold over the counter (OTC) via a brokerage. This means you can customise the terms of a forward to meet specific needs. As the transaction is incomplete until the end of the contract period, forwards are also inherently different to swaps.

• FX swaps and FX options

FX options feature locked-in rates and predefined contract periods like forwards and futures. The transaction is not completed until the end of the contract period — a primary difference between FX swaps and options derivatives. Unlike forwards and futures, options do not carry an obligation to complete the transaction.

The benefits of forex swaps

What are the benefits of forex swaps? What do traders get out of completing this sort of transaction? Read on to discover more about the advantages of this type of foreign exchange transaction.

Access to foreign capital

In the most basic sense, a forex swap enables traders to access foreign capital they may need for business purposes. If a trader wants to invest in a foreign market, they may need to exchange their domestic currency resources to gain access to the capital they need. This means paying the associated fees, which can be high, particularly when a large amount of capital is exchanged.

With a forex swap, traders may be able to access the capital they require in a more manageable and cost-effective manner. This may provide a more effective platform for foreign investment and business dealings than other sorts of currency exchange. However, this requires a strategic approach, careful calculation, and accurate forecasting for the future of the forex market. Even with all these measures in place, there are no guarantees that the strategy will be successful.

Ability to borrow at a better interest rate

With a swap in the forex market, traders will pay an interest rate based on the currency they receive as part of the exchange. In the case of a fixed rate swap, this interest rate will be locked in for the duration of the exchange contract, while a fixed to floating rate will fluctuate along with the interest rates applied to the foreign currency. In some cases, this interest rate may be more attractive to the trader than those involved in their domestic currency.

With the fixed rate swap, there is no risk of the interest rate changing over time, and the calculation is more straightforward. With fixed to floating swaps, however, the calculation becomes more complex as the trader must carefully forecast and predict future changes in the foreign currency’s interest rate.

Speculation capabilities

Traders may use forex swaps to speculate on relative price movements between currencies. Once a quote currency value is agreed upon, this value is set in the terms of the contract. When the contract reaches maturity, the exchange is reversed. If the quote currency value has moved above the predetermined exchange rate, the party who put up the quote currency initially makes a profit. If the quote currency value has fallen below the predetermined exchange rate, they will make a loss.

A range of different choices

Traders have a wide range of choices when they approach a forex swap. There are over 180 currencies listed on the foreign exchange market, and any of these currencies can be offered up in a trade. While most currency pair trades are made on pairs involving the same major currencies — including the United States Dollar and the European Euro — swaps can be made with any listed currency, provided the parties can agree on a rate of exchange.

Enjoy swap-free accounts with VT MarketsThe swap-free account is one of the best features of trading with VT Markets! This means you can trade without any worry about frustratingly high swap fees and overnight charges. You can simply focus on doing what you do best – trading and accomplishing  achieving its rewards. Try it now by setting up a demo account, until you graduate to a full trading account.