Section: Pre-school, What is forex, The different ways to trade forex, (retail forex)
There are different statements that I don’t fully understand in pre-school listed below:
Although a spot forex contract normally requires delivery of currency within two days, in practice, nobody takes delivery of any currency in forex trading.
Q: When babypips say “nobody takes delivery of any currency in forex trading”. Are you saying that they don’t physically deliver the money in general (for both spot FX and Retail Forex) or is it that they’re just referring to the ‘retail market’ that retail forex doesn’t do delivery only in spot FX does delivery?
The position is “rolled” forward on the delivery date.
Q: When babypips say “rolled” what do they mean, also “rolled forward on the delivery date”. I thought retail forex had no delivery date, wouldn’t that mean I would physically deliver/receive the physical currency. Or is it that there Is a delivery date but it’s just being rolled over (tomorrow next)?
Remember, you are actually trading a contract to deliver the underlying currency, rather than the currency itself.
Q: This statement is from ‘The Different ways to trade Forex’ under the sub-topic ‘Retail Forex’. If I’m trading a contract to deliver the "underlying currency, rather than the currency itself. Isn’t that saying I still have to deliver the physical currency, Isn’t “underlying” the same as saying the actual thing (physical currency)?
In private retail trading, we are not buying or selling anything, no assets change hands. We place bets with brokers as to whether exchange rates will rise or fall.
Yep. For context when you exchange at an exchange centre there you’re purchasing another currency. You’re carrying out a similar exchange, except, you’re in position of a contract for a guaranteed delivery in 2 business days.
My guess is that’s a rule that’s been set in place for when spot contracts were exchanged before the net. There are even more clearly defined and complicated definitions for business days based on end of month and holidays probably so every broker was legally obligated to fulfill those guidelines to ensure legal spot transactions.
There are mainly 4 types of FX transactions: Spot, outright forwards, forward swaps & options. Retail traders mainly trade in spot and options, while outright forwards and forward swaps are used by institutions for hedging.
Basically if you’re getting a quote of 1.3000 now but a delay in the processing time may mean that the rate when processed is instead 1.3050. You will now get fulfilled with 1.3050 instead, which is what the rollover process is describing.
The definition of days is easier to imagine when you picture the days when folks had to call their brokers, get an outdated quote and probably wait a day or two for the contract to get fulfilled. Keep in mind the broker had to contact a liquidity provider to execute the contract too.
Because things happen instantaneously now you don’t see this except when you trade around big news events, where even a micro second delay can cause a significant change to the pip value.