Strangle Options Strategy » Futures Trading

Trading Education: The Fatal Mistake Traders Make

admin — Sun, 24 Jan 2010 09:47:19 +0000

Financially Fatal is the best way to describe this particular mistake that 95% of all traders make. It is the primary reason that even though traders are generally smarter than average, the failure rate is incredibly high in trading.
This is the one reason that so many traders fail even though they certainly have the ability and the aptitude to trade successfully. Because of the other factors that come into play, why this happens is very understandable, and it is not very foreseeable on the part of the trader.
Luckily, this situation is one that can be rectified before a person is completely done for in trading. The earlier in a trader’s career one can become aware of the phenomenon, the faster that person will reach a level of proficiency and consistent profitability.
Here is an explanation of what happens and what the individual trader can do to turn the odds in their favor.
The Root of the Problem
Trading is very much like other professions in that there is a considerable body of knowledge involved in the activity. While the core concept of trading is very easily understandable by most, trading as an occupation has a substantial body of knowledge to absorb and certain skills that are required to trade profitably and consistently.
As with most professions, there is a gradient to the body of knowledge in trading. There are many different concepts to be learned which are prerequisite for the full understanding of other more complex or in-depth subjects.
To illustrate the problem, let’s look at a familiar example: mathematics.
Math begins with simple counting and quantifying, then moves into adding, subtracting, multiplying and dividing. Next come algebra, geometry, and trigonometry. These provide the necessary concepts to then move into such higher math as calculus, differential equations, La Place transforms and others.
If a person were to try to go directly to algebra without a full grasp of basic math, they would be lost. If one enters calculus without a reasonably strong base in algebra, working the problems is difficult at best, and often impossible.
The Fatal Mistake Traders Make
What many traders do is go straight to intermediate level trading without the foundational concepts well developed. They jump way ahead on the gradient.
Now the problem is that when this situation occurs, it affects more than just the ability to assimilate new information. It also creates a physiological effect that interferes with already developed functions because of what is going on in the brain. Effectively it is almost like short-circuiting your brain when trying to operate under these conditions.
This is one explanation why very successful business people will often make decisions in their trading that they wouldn’t make anywhere else in their business life. Outside of trading they are brilliant, and are very wise in the ways of money management. In trading they will cause their own losses of thousands or even millions of dollars.
So why does this happen, and why is it so common? In the book, “The Subtle Trap of Trading,” the author explains in detail the five factors that come into play that set so many intelligent people on the road to ruin in the world of trading.
There are documented studies on the obstacles to learning that have found that there are specific physiological reactions when a person encounters this particular situation, that of starting too high up in a learning gradient or missing foundational knowledge while trying to grasp concepts at a given level.
This is the fundamental mistake that many traders make, and they are generally consciously unaware of this particular situation and its ramifications. Many people begin active trading without the foundational knowledge to trade at the level where they become active. When this happens, this creates a considerable obstacle to adequate learning within an efficient time frame. Subsequently, the trader often winds up taking a severe financial beating, often depleting their entire account before they have established a sufficient knowledge and skill base to trade proficiently.
Understand, the individual traders are not to blame. This is a problem of the system that unfortunately most have to go through. There is no certification or training required before a person is allowed to put themselves and their money at real risk, so the high failure rate in trading is primarily the result of inadequate warning and preparation for what trading entails.
Avoiding the Mistake (and What to do if you’ve made it)
Those that are fortunate a enough to pursue the proper guidance and help are the ones that can minimize the effects of this phenomenon which is so prevalent in the trading world. If one can find a mentor that recognizes this particular obstacle and the others that are present in the development of a trader, then chances are likely for a good trading experience. Most however choose to do it themselves or simply make it on sheer persistence alone, while learning the lessons of trading the hard way, through personal experience and substantial losses.
Rather than fall prey to this mistake, as many do, you have the option to save yourself considerable time, losses and personal anguish. This begins with backing up so to speak and making sure that you’ve got the basics fully covered, and then proceeding forward with a focus on mastery and development.

Trading Gold…This Precious Metal Will Continue to Shine

admin — Sun, 10 Jan 2010 09:11:53 +0000

All Portfolios Should Contain a Percentage of GoldAnyone who can afford to should own gold. There are many legal ways of having gold, however, it comes down to either physically possessing it, or owning shares on paper. Most experts agree that taking physical possession of gold is a good idea as a bet against inflation. There are two ways to own real physical gold, and most people who do, I feel are purchasing it in the wrong form. Gold bullion in the form of small bars or coins is the preferred method by most buyers. The reason why I feel it is a mistake to own gold in this manner is twofold. First of all gold is a commodity, and as such restricted by regulations of any commodity. The second reason has to do with history. In 1933 all but $100 of the non collectible gold was confiscated by the government when we went off the gold standard. With the world in its current financial turmoil there are many that believe that the inflation that will follow a recovery might force us back into a gold standard. If that happens anyone in possession of gold bullion will get a fair market price for it, and than it will be confiscated.On the other hand, if you own, what is deemed as rare or collectible gold it cannot be confiscated. In fact this kind of asset is considered private, and is no ones’ business but yours. Yes you pay a premium for it, but in the long run it will be worth it. It doesn’t have to be old to be considered collectible. All proof bullion coins also fall into that category. Let us assume that at the turn of this century you purchased a one ounce American gold eagle and a one ounce eagle proof. Today your gold eagle, which you bought for approximately $350, is worth three times that much. While the proof that you paid approximately $500 for, is now valued at four or five times what you paid for it. For those of you looking into buying physical gold, you might want to consider this. It is my understanding that the U.S. mint has temporarily suspended the manufacturing of proof coins, but there are many dealers that still offer them.For traders, there are many avenues to take when looking into trading gold. If you are looking for a day trade, the gold index seems to fluctuate enough, that with the right technical charting you should be able to make excellent profits on a daily basis. There are many goldmine stocks that, if charted correctly can be swing traded very successfully. I don’t do a lot of futures trading, but it seems to be that until gold breaks the thousand plus resistance, the future will be very much as it is in the present. Many experts see gold topping the two thousand per ounce mark, but so far there are no indications of that happening in the near future.Good Charting Can Be Compared to a Treasure MapThere is Gold in Them Thar Technical’sAs I mentioned, precise technical charting is the key that will unlock that treasure chest of gold. In fact, it will greatly increase profits in any trading you pursue. Let us assume that you have some knowledge or you wouldn’t be researching the market. Any training you receive should be for technical analysis, or you are just wasting time and money. As far as software platforms, the following suggestions I strongly feel are necessary for any software to be useful.1. It must be able to offer live streaming technical data. (Otherwise the program is merely educational) 2. The platform should defiantly include candlestick charting.3. Visually it has to be large enough for all the data to be seen easily. (Many of the online brokerage’s technical data is too small to be useful) 4. It must be cost effective. (Most good systems can be purchased for between one and two hundred dollars)Use a Candle to Light Your Golden WayCandlestick Charting is a Goldmine of Wealth For those of you not yet familiar with candlestick charting, I will try to give a brief but accurate explanation. The Chinese invented the market concept, and the Japanese perfected charting techniques with the use of the candlesticks. It is easy to understand this complex system, if we simply break it down to the ticks on the chart you follow every day. We know that the lower tick is where the stock opened and the higher is where it closed. Now if we made the two lines parallel and connected them, what would we have? A candle. However, during that movement, the stock might have gone lower or higher then where it opened or closed, so our candle has formed a tail and a wick. Is it starting to make a little sense to you? Can you see the advantage of knowing this information, for getting in and out, and setting a stop loss?I don’t profess to being an expert, but I do know of some. I obviously don’t have the time to go into all the details now, but at my site Market Mentalist you will find all you need to know about investing online. There is access to some of the top trading systems available including software, books, newsletters, and Forums. Whether you are an inquisitive novice or a seasoned pro Market Mentalist offers the online investment resource, you just might be seeking.

Hesitating Before a Trade

admin — Fri, 08 Jan 2010 21:23:20 +0000

Hey Joe! No matter how hard I try, I still find myself hesitating before a trade. Any comments about that?

There are any number of reasons why a trader hesitates before a trade. The main one is lack of planning. Without a plan, there is no degree of confidence a trade will be successful, it’s all wishful thinking. Unless they are outright gamblers, traders usually have a strong need to protect their assets and avoid risk. This is especially true for beginning traders. It can take a long time to build up sufficient capital for serious trading. By that I mean sufficient capital to be able to trade for a living. It is quite understandable to fear losing all or part of your initial capital. Beginners tend to seek absolute certainty before taking a risk, and gaining true confidence in you ability to trade successfully can take time. Unscrupulous marketers of mechanical trading systems and methods take advantage of the beginners fears and lack of confidence by advertising “sure-fire” “magic” ways to trade, instead of revealing the truth about the difficulties in becoming a consistently successful trader.

When it comes to short term trading, there isn’t very much time for long deliberations. Market conditions are in continuous flux. Decisions need to be made relatively quickly, and if one waits too long to execute a trade, he or she may miss a significant opportunity. The reasons for hesitation are everywhere, and traders must be aware of them, and create a plan to prevent them. Let’s look at a few of the things that cause traders to hesitate:

The complex charting software available these days tends to increase hesitation. Traders think that the more confirmation they can get from indicators, the more certain they can be that a trade will be successful. However, all indicators lag the market. The notion that an indicator can somehow predict what will happen once a trade is entered is nothing more than wishful thinking. An indicator may give some degree of confidence about entering a trade, but the indicator cannot trade the trade, only the trader can do that. Once a trade is entered, it becomes entirely a process of management. It’s tempting to look at as many indicators and signals as possible. Doing so, however, can be very time consuming. That’s why seasoned traders advise looking at only a few if any key indicators.

Hesitation is often related to a lack of confidence in the trader’s trading strategy or trading ability. There are numerous reasons for such lack of confidence. Some of the reasons are shallow and mostly on the surface, like being distracted by watching financial TV while trading. Other reasons are more deep-seated, and actually reflect psychological problems dating all the way back to early childhood. A trader may not believe that his or her trading plan is adequately developed. Nevertheless, they are determined to trade, so they muster up their courage and finally jump into a trade almost guaranteeing that the outcome will be a matter of pure chance. Some traders may question their trading plan because they know that they did not spend enough time preparing it. Sometimes hesitation is intuitive, warning the trader to avoid the trade. All too often, traders are not tuned into their own intuitive feelings. In the case of intuition, hesitation can act as a motivator. If the trader feels the hesitation is because of lack of adequate preparation, then that trader must learn to spend more time preparing for trades. By studying the markets a trader can come to see new higher probability setups, thereby reducing doubt and indecision, and in turn stop the hesitation because of more adequate preparation.

Hesitation sometimes reflects a deep desire to be right and a fear of being wrong. It has been our experience that many of the people who are attracted to trading fit into this category. Great care must be taken by physicians, engineers, scientific types, and mathematicians, who seem to be the most prone to this type of hesitation. They are often perfectionists afraid to face their inadequacies. By putting off a decision, they don’t have to face their limitations, and can pretend they are better traders than they really are. If I had the time and space, I could give you dozens of examples of this kind of hesitation. The perfectionist’s reality states that everything must be in order and follow rules. They think strictly inside the box. They want everything to be perfect, so they continually second guess and doubt themselves and what they are doing. They believe that they cannot cope with being wrong. This occurs in trading decisions as well as other life decisions. Extreme perfectionists often think that once they make a bad trade, it will be the start of a downward spiral and a complete blowout of their trading account.

Hesitation very often relates to low self-esteem or other deep-rooted psychological issues. We see these more times than we would like to. Traders with low self-esteem usually lack confidence, not only in trading, but other areas of life. Beneath it all, they doubt their ability to trade, and hesitate making a trade until they the guilt of not doing so overcomes their fear. At that point in time, they enter a trade out of pure compulsion driven by guilt. This exposes them to a trade with no real plan to support it. They become victims of pure chance. We also find that traders who hesitate may have a conflict regarding their success. They can actually fear success. They have been told by parents or others that they were no good, that they would never amount to anything, that they were “bad.” These people strive for success at one level of their consciousness, but at a deeper level, they secretly believe they cannot attain it, or do not deserve it.

Identifying, directly facing, and eventually eliminating a problem of hesitation is the only way to truly deal with it. Chronic hesitation will eventually destroy the confidence a trader needs for success. If the problem is not dealt with and the traders continues to hesitate, miss important market moves, and see his or her equity begin to dwindle, that trader runs the risk of becoming a phantom trader, a pretender, becoming convinced that the imaginary trades being made are real. If you are prone to hesitation, it’s vital that you deal with this problem early in your trading endeavors. Identify the reasons for it, confront the problem, and make changes as soon as possible. These are changes you have to make within yourself. If you will truly engage in self-examination with the object of eliminating hesitation, you can trade become consistent and successful in trading profitably.

Currency Options give you Unlimited Profit Potential with Limited Risk

admin — Fri, 08 Jan 2010 20:42:54 +0000

Options give you unlimited profit potential and limited risk. If used correctly currency options will give you staying power and huge leverage, but most traders don’t know how to use them correctly.

What you need to do is know how to use currency options correctly which the bulk of traders fail to appreciate.

Getting the Odds on Your Side

We are not going to go into details about how currency options work, there’s plenty of free information on the Internet – here we’re going to look at strategies to increase your odds of success.

Potential Rewards are not what they Seem

The first thing a trader needs to consider when buying an option is how much time is needed, and what strike price is a good target.

Many inexperienced currency options buyers look at the profit potential, and don’t consider the potential losses.

They buy strike prices too far out of the money, and options that are to close to expiry.

Just like the mug gambler who always backs the outsider, they lose their bet.

So, How Can You Increase the Odds of Success?

There are two points to keep in mind:

1. Time to expiry of the option

2. The strike price targeted

Firstly, you need to keep time on your side, and buy strike prices that are not to far out of the money – buy “in the money”, or “at the money” options.

Your profit potential may not be as great, but your risk will be reduced – and your chances of Success far greater.

Keep in mind your option does not just need to go your way from when you bought it – it needs to trade in the money by expiry.

For example, a trader sees the pound trading at 1.70 and buys a 1.90 call. The price goes the way they thought and reaches 1.87 – they then run out of time and the option expires worthless. This happens all the time – prices move in the right direction, but the trader makes no money.

The trader feels they were unlucky – and tries the same again.

However, keep in mind “being close” does not make you money in options trading!

To make money in options you need to buy in the money options, with plenty of time value – this will increase your odds of success dramatically.

How to Buy Currency Options in Longer Term Trends

When trading the longer-term trend, position yourself into the trend in the following way.

. Identify the long-term trend via technical analysis

. Wait for a dip in the currency to position yourself in the trend.

. Watch for dips to support – and then look for confirmation with stochastic crossovers, or other momentum tools to initiate the trade.

. A great way of buying options in the long-term trend is to look for dips to the middle of a Bollinger band to time entry. This is a good timing tool in strongly trending markets.

The above is a simple strategy, and one that can help you make big profits from currency trend following. Use options correctly, and you will have limited risk, unlimited profit potential and great odds of success.

Don’t make the mistake that most novice traders do – make sure you use time to your advantage – and keep those strikes in, or near the money, and you will create big capital gains longer term.

Currency Options give you Unlimited Profit Potential with Limited Risk

admin — Fri, 08 Jan 2010 20:42:54 +0000

What you need to do is know how to use currency options correctly which the bulk of traders fail to appreciate.

Getting the Odds on Your Side

Potential Rewards are not what they Seem

The first thing a trader needs to consider when buying an option is how much time is needed, and what strike price is a good target.

Many inexperienced currency options buyers look at the profit potential, and don’t consider the potential losses.

They buy strike prices too far out of the money, and options that are to close to expiry.

Just like the mug gambler who always backs the outsider, they lose their bet.

So, How Can You Increase the Odds of Success?

There are two points to keep in mind:

1. Time to expiry of the option

2. The strike price targeted

Firstly, you need to keep time on your side, and buy strike prices that are not to far out of the money – buy “in the money”, or “at the money” options.

Your profit potential may not be as great, but your risk will be reduced – and your chances of Success far greater.

Keep in mind your option does not just need to go your way from when you bought it – it needs to trade in the money by expiry.

The trader feels they were unlucky – and tries the same again.

However, keep in mind “being close” does not make you money in options trading!

To make money in options you need to buy in the money options, with plenty of time value – this will increase your odds of success dramatically.

How to Buy Currency Options in Longer Term Trends

When trading the longer-term trend, position yourself into the trend in the following way.

. Identify the long-term trend via technical analysis

. Wait for a dip in the currency to position yourself in the trend.

. Watch for dips to support – and then look for confirmation with stochastic crossovers, or other momentum tools to initiate the trade.

. A great way of buying options in the long-term trend is to look for dips to the middle of a Bollinger band to time entry. This is a good timing tool in strongly trending markets.

Don’t make the mistake that most novice traders do – make sure you use time to your advantage – and keep those strikes in, or near the money, and you will create big capital gains longer term.

Currency Options give you Unlimited Profit Potential with Limited Risk

admin — Fri, 08 Jan 2010 20:42:54 +0000

What you need to do is know how to use currency options correctly which the bulk of traders fail to appreciate.

Getting the Odds on Your Side

Potential Rewards are not what they Seem

The first thing a trader needs to consider when buying an option is how much time is needed, and what strike price is a good target.

Many inexperienced currency options buyers look at the profit potential, and don’t consider the potential losses.

They buy strike prices too far out of the money, and options that are to close to expiry.

Just like the mug gambler who always backs the outsider, they lose their bet.

So, How Can You Increase the Odds of Success?

There are two points to keep in mind:

1. Time to expiry of the option

2. The strike price targeted

Firstly, you need to keep time on your side, and buy strike prices that are not to far out of the money – buy “in the money”, or “at the money” options.

Your profit potential may not be as great, but your risk will be reduced – and your chances of Success far greater.

Keep in mind your option does not just need to go your way from when you bought it – it needs to trade in the money by expiry.

The trader feels they were unlucky – and tries the same again.

However, keep in mind “being close” does not make you money in options trading!

To make money in options you need to buy in the money options, with plenty of time value – this will increase your odds of success dramatically.

How to Buy Currency Options in Longer Term Trends

When trading the longer-term trend, position yourself into the trend in the following way.

. Identify the long-term trend via technical analysis

. Wait for a dip in the currency to position yourself in the trend.

. Watch for dips to support – and then look for confirmation with stochastic crossovers, or other momentum tools to initiate the trade.

. A great way of buying options in the long-term trend is to look for dips to the middle of a Bollinger band to time entry. This is a good timing tool in strongly trending markets.

Don’t make the mistake that most novice traders do – make sure you use time to your advantage – and keep those strikes in, or near the money, and you will create big capital gains longer term.

Online Trading; Why I Hate Economists!

admin — Fri, 01 Jan 2010 09:01:34 +0000

In mid-July 2007, the Dow Jones index stock market made what appeared to be an important top.
Naturally, this gave rise among the usual TV pundits to pessimistic perceptions of the US economy, the long-term impact of the war in Iraq, and so on. However, what is fascinating and even mildly annoying is that just a week prior, when the Dow Jones broke to new all-time highs on July 12th, the analysis could not have been more euphoric. At least one economic commentator could see the Dow many thousands of points higher by year end.
So, where is this guy hiding now, especially in light of the US home loans crisis that came to the surface a very short time later?…
All of this demonstrates the fickle nature of those who try to forecast stock, currency, commodity and bond market movements using purely economic arguments alone. During my time on the floors of major investment banks, these characters were a constant irritation to me, not least because of the worship the entire industry unfailingly pays to them. It seems that in this world you get eternal credit for SOUNDING as if you know what you are talking about, regardless of whether or not you actually do!
However, the proof of the pudding is very simple: how accurate are they?…
The answer is, not very. In fact, I am reminded of an old adage from Elliott Wave theory which states that when everyone is madly bearish, the market is probably making final BOTTOM. When everyone and his brother are wildly bullish, so much so that even the restaurant waiter is checking his stock portfolio, you know you’re close to final TOP!
This unlikely advice is astonishingly accurate. In fact, I remember once buying a new home based partly on this perspective. So, this isn’t just a fancy theory. I’ve actually profited from it in real life.
The essential problem is that these economic pundits are providing reasons AFTER the fact for why the market has done what it has already done, and they always look good riding on a trend that they imagine is likely to carry into the future. However, what most uncritical people fail to realize is that there is no empirical PROOF for anything these jokers are saying. In other words, there is no evidence that the market moved BECAUSE of the specific factors that they discussed! Where’s the proof of that?
Answer: “There ain’t none!”
The stock market or forex market moved, and afterwards they said something about what they believe to be the causes. However, there is not necessarily any connection whatsoever between the market’s actual move and the causes they cite.
This is why the technical analysis approach is always superior and far more accurate than the best economist can ever be. It makes no pretentious claims about the ‘why’ of market movement, but simply tells you, from the point of view of probabilities, what the market is most LIKELY to do. Almost invariably, a good technical analyst can tell from the charts that the market is about to make a top or a bottom, and they will tell you so well in advance of the event. They will then observe to their chagrin and annoyance, as I have had to do on countless occasions, an ‘expert’ economist explain the ‘reasons why’ the market made said move.
And who sounds the most impressive and gets the most credit in this screwed up world of ours? The guy who actually told you the move in advance, and maybe even traded it, or the guy who comes on AFTER the move has happened and spouts a bunch of complex-sounding fancy words and theories?
I’ll give you a clue: it’s not the first guy!
Of course, said expert can never call the moves in advance, but they can always explain them with extreme eloquent after the event! They make their careers on the fact that the human mind has this ferocious need to know WHY, even if there IS no overall single why to be found.
This is the topic for another article, but in brief we can say here: the markets are far too complex and multi-variable, and at motion simultaneously in a whole range of different time-frames, to ever be reduced down to a few handy formulas such as inflation, budget deficit, interest rate expectations, home loan mortgage crisis, or whatever.
Certainly, the financial markets may use some of these factors as an excuse to do what they were going to do anyway (and it is the technical analyst, studying the charts, who is going to make the forecast in advance of the move, not in retrospect). However, to suggest that there is a simple cause/effect relationship between what the financial markets do and what economists imagine in their tiny minds are the reasons is frankly laughable, if it were not so dangerous.
Here is the danger, and it is one that the trader can all too easily fall into: the danger of believing in it!
In this modern age, we are deluged with information, and so it is critical that we pay attention only to information that is valuable. The latest ravings of your Johnny-come-lately TV economist are NOT accurate information as far as forecasting market movements is concerned, or even understanding past movements or current trends.
Again, the reason why is that there is no empirical proof that all this expert sounding blah-blah has any connection to reality whatsoever. The fact that it sounds good does not make it good, or even useful. What you need as a trader is a methodology that has proven itself over the test of time, not just another blast of hot air.
Hence, the trader should be very wary of what he/she lets into the mind and allows to influence trading decisions. You might find yourself over-riding your own impulses, or even your proven trading system, because of something some idiot said on TV! You then have plenty of time to regret it when your original impulse proves correct, but you are not in the move, thanks to some damn economist!
Listen to this and listen good: You’ve got to cut the BS out of your trading process!
So, if you are prone to listen to these clowns, take a good hard look at yourself and what you are doing. How often has this additional so-called information actually helped you profit in trading, and how often has it confused you or caused you to lose? Be very cold-blooded about asking yourself this. I think you will then see the brutal truth of what I am telling you!
In conclusion, don’t try to ‘understand’ the underlying causes of market moves because they are essentially beyond human comprehension. If you want an equally futile task, stand outside on a windy day and try to ‘explain’ the specific fundamental causes behind each gust of wind that strikes your face. Instead of trying to understand, or trying to use such arrogance as part of your trading method, instead work upon a method that forecasts stock, bond or forex market moves based upon sound principles that repeat with high probability.
You will almost certainly achieve the latter through a sound understanding of the technical factors associated with financial market price charts.

Derivatives of Currency Trading and the Forex

admin — Wed, 16 Dec 2009 11:01:35 +0000

Derivatives of the Forex trading system are spot trading, futures trading, forwards trading, options trading and swap trades. Many inexperienced Forex traders tend to focus on spot trading. Spot transactions are over-the-counter transactions, handled outside of an organized exchange.

Spot Trading – Spot trading in the Forex trading system is what is termed Forex. A Forex currency trade is a simple simultaneous transaction that involves the exchange of one currency for another. Forex currency trades may be settled within 2 days, except in Canada where exchanges may be settled within one-day.

There are two parties and two positions with any trade. The party who delivers a commodity holds a short position. The party who receives the delivered commodity holds a long position. In other words, the seller holds the short position and the buyer holds the long position. There are no restrictions and limitations in Forex spot trading as long as there are parties willing to a trade and liquidity in the currencies being traded. Spot trades incur a transaction charge per trade called a margin or spread. A margin is calculated as the difference between the current bid price and the asking price.

Forwards Trading – A forwards trade is a trade in which the traded commodity has a date of delivery some time in the future. Typically, a forward contract may have a date of delivery one, two, three, six or twelve months into the future. Traders use forwards to take advantage of interest rate differences between countries and this difference is usually factored into the cost of a forwards trade. The value of a forward is determined by the difference in interest rates offered by the countries whose currency is involved in the trade. The cost of a forward may be higher or lower than the current spot price of a currency. When a higher price is charged for a forward, it is called a premium while a lower price is a discount.

Futures Trading – A futures trade is similar to a forward trade where a buyer and seller trade currencies for a predetermined price, at some time in the future. The difference between a futures and forward trade is that futures are traded on a regulated exchange and forwards are not. Futures trades incur round-turn commissions that are generally higher than the margins required for spot trading. You must make a deposit on futures to serve as a margin or bond for the trade. If market events indicate that a currency will increase in value over the term of a future, a lower price will have more worth when it is traded. The difference between the price for a future and the market price of currency is added or subtracted from the margin value. You must replenish any loss in margin in order to continue to hold a position in the trade.

Options Trading – Options are a form of currency trading where you are given the option to buy a specific amount of currency before a specified date. Options differ form forwards and futures because options give you the right to buy or not buy. Generally, traders will seek options when there is an indication of stability in currency exchange rates while speculators may assume the risk in hopes of making a profit. As a buyer, you are required to pay a premium for options and that premium is forfeited if you fail to exercise the option. Premium prices are established based upon how likely the market perceives that the option will be exercised. Premiums may be calculated as the difference between the current spot price and a future strike price or they may be involve more complex calculations, based on market conditions and the timeframe before the expiry date.

Options include both a call and a put. The right to buy currency is a call option while the right to sell currency is put option. The option to buy US dollars and sell Japanese yen, for example, is a yen call and dollar put. The price that the buyer agrees to pay is called the strike price or exercise price and the amount of currency that may be bought or sold is called the principal. Options may be purchased on an exchange or over-the-counter and then bought and resold. US style options are purchased on an exchange and have a strike price, expiry date and contract size. Options bought over-the-counter are bought in interbank. Options offered in the interbank market are usually European style options where the terms of the contract are negotiated between the seller and buyer.

Swaps – A swap is a combination of a spot and forwards trade. A swap involves the trade of currency on a specified date and an agreement to trade it back at a later date. A swap provides you with an alternative to borrowing foreign currency. If you need liquidity in a currency, you may swap for the needed currency. This involves a spot transaction to initiate a trade and a forward transaction to buy back the currency in the future. Large banks and corporations tend to favor swaps. Individual investors rarely engage in swaps.