There is a secondary OTC market that provides a way for retail (“poorer”) traders to take part in the forex market.
Access is granted by so-called “forex trading providers“.
Forex trading providers trade in the primary OTC market on your behalf. They find the best available prices and then add a “markup” before displaying the prices on their trading platforms.
This is like how a retail store buys inventory from a wholesale market, adds a markup, and shows a “retail” price to their customers.
Forex trading providers are also known as “forex brokers”. Technically, they are not brokers because a broker is supposed to simply act as a middleman between a buyer and a seller (“between two parties”). But this is not the case, because a forex trading provider acts as your counterparty. This means if you are the buyer, it acts as the seller. And if you are the seller, it acts as the buyer. To keep things simple for now, we will still use the term “forex broker” since that’s what most people are familiar with but it’s important to know the difference.
Although a spot forex contract normally requires delivery of currency within two days, in practice, nobody takes delivery of any currency in forex trading.
The position is “rolled” forward on the delivery date.
Especially in the retail forex market.
Remember, you are actually trading a contract to deliver the underlying currency, rather than the currency itself.
It’s not just a contract, it’s a leveraged contract.
Retail forex traders can’t “take or make delivery” on leveraged spot forex contracts.
Leverage allows you to control large amounts of currency for a very small amount.
Retail forex brokers let you trade with leverage which is why you can open positions valued at 50 times the amount of the initial required margin.
So with $2,000, you can open a EUR/USD trade valued at $100,000.
Imagine if you went short EUR/USD and had to deliver $100,000 worth of euros!
You’d be unable to settle the contract in cash since you only have $2,000 in your account. You wouldn’t have enough funds to cover the transaction!
So you either have to close the trade before it settles or “roll” it over.
To avoid this hassle of physical delivery, retail forex brokers automatically “roll” client positions.
When a spot forex transaction is not physically delivered but just indefinitely rolled forward until the trade is closed, it is known as a “rolling spot forex transaction” or “rolling spot FX contract“.
In the U.S., the CFTC calls it a “retail forex transaction“.
This is how you avoid being forced to accept (or deliver) 100,000 euros.
Retail forex transactions are closed out by entering into an equal but opposite transaction with your forex broker.
For example, if you bought British pounds with U.S. dollars, you would close out the trade by selling British pounds for U.S. dollars.
This is also called offsetting or liquidating a transaction.
If you have a position left open at the close of the business day, it will be automatically rolled over to the next value date to avoid the delivery of the currency.
Your retail forex broker will automatically keep on rolling over your spot contract for you indefinitely until it is closed.
The procedure of rolling the currency pair over is known as Tomorrow-Next or “Tom-Next“, which stands for “Tomorrow and the next day.”
When positions are rolled over, this results in either interest being paid or earned by the trader.
These charges are known as swap fees or rollover fees. Your forex broker calculates the fee for you and will either debit or credit your account balance.
Retail forex trading is speculative. This means traders are trying to “speculate” or make bets on (and profit from) the movement of exchange rates. They’re not looking to take physical possession of the currencies they buy or deliver the currencies they sell.
If you’d like to earn extra income trading on the Forex market, consider learning how to currency trade with Forex Smart Trade. With their super-accurate proprietary trading tools and best-in-the-business, personalized one-on-one training, you’ll be successful. Check out the Forex Smart Trade webinar. It shows one of their trader’s trading and how easy, intuitive, and accurate the tools are. Or try the Forex Smart Trade 14-day introductory trial for just TEN dollars.