You’ve probably heard of currencies, and you’ve probably heard of currency futures. But do you know how to trade currency futures? In this post, we’ll cover the basics of currency futures, how they work, and the best strategies for trading them. If you’re interested in learning more about currency futures, read on.
What is Forex Trading?
Forex trading is when a trader buys a currency and sells a different one, and the exchange range fluctuates according to the demand and supply. The trade for currencies takes place in the foreign exchange market that is open from Monday to Friday.
The Foreign exchange market is open 24 hours a day. All currencies are traded over the counter (OTC), which means there are no physical exchanges, and a worldwide network of financial institutions and banks oversee the operations. As a result, the vast majority of trading in the market is between institutional traders.
What is Futures Trading?
A futures contract is when two parties sign an agreement to buy or sell an asset at a specific price on a future date. For example, one party agrees to purchase an asset on a specific date, while the second party agrees to sell the asset on the date decided. The two parties already agree upon the price of the asset.
Usually, these agreements take place over standard commodities such as:
- Bonds
- Oil
- Gold
- Wheat
- Price of a stock index
The futures agreement is always made on commodities that are regulated. However, one thing that is important to keep in mind is that some commodities (oil, gold, wheat) can be delivered, whereas other commodities (index futures) can be converted into cash.
What is Currency Futures?
Forex trading is the largest financial market in the world and is becoming hugely popular. Millions of people worldwide are entering the market and trying to make profits. However, before entering the market for currency futures, you should be aware of the basics.
Currency futures are also known by other names such as Foreign exchange futures or Forex futures. They are exchange-traded contracts where traders oversee the price of currencies they intend to buy or sell in the future.
The contract for currency futures is legal, and all the traders that have signed the contract must complete the transactions on the date that has been decided. Traders that have signed the contract will have to deliver the selected currency and pay the agreed price.
Currency futures are also used as a strategy to minimize currency-related risks and hedge trades.
Basics of Currency Futures
The practice of betting on currency futures first took place in Chicago, at the Mercantile Exchange, in 1972. As stated earlier, Forex is the biggest financial market globally, thousands of corporations and individuals are involved in the trading, and new currency futures contracts are made daily.
However, before they indulge in currency futures, traders must have sufficient capital in their trading account. The margin of profit of loss in currency futures is slim, as the currency’s price might fluctuate. The best strategy to apply is to close all trades before the expiration date by either selling or buying more currencies.
Some currencies have different future contract rules, such as the South African rand and Mexican Peso. These currencies only allow futures forecast four times a year. Let’s explain currency futures with the help of an example:
If traders buy Euro Forex futures by using the US dollar and signing a futures contract (exchange ratio is 1 EUR: 1:20 USD), the traders will receive the total amount of 12,500 Euros, as that’s how much each Euro futures is worth.
Once the trade has been made, the traders will need to pay the seller using the USD, and in return, they will get Euros. In simpler words, the traders set the expiration date and the price, and the date is set in stone.
Currency Futures Contracts
When trading currency futures, there are many varieties of contracts available. The most commonly used contract is the EUR and USD futures, but traders can also trade the E-Micro Forex futures contracts that allow 1/10th of the currency futures contract size.
There are also futures in which clients sell or buy several currencies at a time. It is also essential to know that the number of contracts depends on liquidity; since EUR/USD trades are most popular, over 400,000 contracts are made every day.
Currency Futures Exchange
Forex market futures are traded in exchanges that are regulated and have a stated price. This also means that all the markets offer a stable price and safe conditions. For example, the CME Group offers up to 49 currency futures contracts and has a liquid of over a billion dollars every day.
The CME is the biggest market for currency futures worldwide. However, there are also other markets such as:
- Brazilian Mercantile
- Tokyo Financial Exchange
- NYSE Euronext
- Futures Exchange
How to Trade Currency Futures?
You can trade currency futures only if all the contracts have the correct specifications, such as tick value, minimum price, contract size, and increment. These specifications are essential, and they determine the accurate position sizing, potential profit and losses, and account requirements.
Here is an example of how to trade currency futures: When working against the Euro and the USD, the minimum increment in price is 0.001, and the tick value is 12.50 USD. This means that every time there is a movement in the price of 0.001, the total contract value will change by 12.50 USD, depending on the direction of the movement.
So if the trade was started at 1.1968 and it increased to 1.1969, the 0.001 increase will increase the contract value by 12.50 USD. If the price keeps increasing to 1.1979 in the long-term, the trader will be 125 USD.
However, if the price movement is going in the opposite direction, the trader suffers a loss of 12.50 USD for every 0.001 price movement. The Euro Forex futures contracts have a minimum contract unit of 125,000 EUR, so even minor changes in the price lead to positive or negative returns.
Is it worth trading Currency Futures?
Trading currency futures are better than Spot Forex, especially for traders that are beginners. This is because currency futures has a lot of benefits, it takes place in a regulated exchange market, and its exchange rate has no additional charges and is risk-free.
Forex trading includes several types of risks. While currency futures offer an upfront price that allows traders to make better predictions, currency futures are centralized, which means the rules are the same for everyone, so this may benefit some traders over others.
Experienced traders will usually use data feeds to make decisions and gain the most out of currency futures. However, while currency futures can lead to traders make large sums of profits, it is not 100 % risk-free. So the advice we can give is to start by learning the basics of the Futures market and then decide whether it is worth your investment or not.
Why is Leverage Required in Forex Trading?
Due to the internet and other means, it is easy to access the Forex market nowadays for traders. The daily trading value at Forex has also increased significantly over the past ten years. As a result, it has also increased the total number of retail traders in the market.
The availability of derivatives, such as CFDs (Contract for differences), allows traders to speculate the rise or fall in the value of currencies without owning the underlying asset. Leverage in the Forex market is important for derivative trading, as it allows traders to enter the market with a small capital amount.
For example, if a trader needs 100,000 dollars to enter the market with leverage, the amount can fall to just 1,000 dollars. Leverage has allowed all types of investors who previously couldn’t invest in the Forex market to enter the market.
How Does Leverage Work in the Forex Market?
Leverage in financial terms is expressed as a ratio (1: 1, 1: 10, 1: 100). The amount of leverage and the size of the initial investment by the trader determine the size of trade they will be able to control. For example, if a trader initially invests 1,000 dollars, the levels of leverage will have a varying effect on the size of the trade.
| Leverage | Size of Trade |
| 1:1 (no leverage) | 1,000 dollars |
| 1:5 | 5,000 dollars |
| 1:10 | 10,000 dollars |
| 1:20 | 20,000 dollars |
| 1:50 | 50,000 dollars |
| 1:100 | 100,000 dollars |
As you can see in the table, the higher the leverage in play, the larger the trade size for the trader. Thus, even though using leverage has several positives, it is still a risky move for the trader. To understand how leverage can lead to losses and profits, traders must understand margin, and we have discussed the concept below.
Different Ways of Trading Forex
There are three ways to trade Forex:
- Spot Market: This is the primary market for trading forex; here, pairings of currencies are swapped, and the exchange rate is determined based on demand and supply.
- Forward Market: Instead of initiating a trade, traders can have a binding contract with another trader in the forward market. The two parties will also decide the exchange rate, amount of currency, and a future date.
- Futures Market: Like the forward market, traders can opt for a contract to sell or buy a fixed amount of the currency at a specific exchange rate in the futures market.
Spread in Forex Trading?
While most forex currencies don’t come with a commission, a spread is a cost that is attached to every trade that traders make. However, leveraged traders will add the spread in the trading cost. The size of the spread also varies and can be influenced by various factors such as currency pairing, trade size, and much more.
The Risks of Forex Trading
Forex traders require leverage, and traders will also use margin, so there are risks involved. Currency prices fluctuate but not by a huge margin, so traders often need leverage to execute a trade. If the trader makes a winning bet, the leverage can help maximize the profits.
However, the leverage can also increase the losses. If the value of a specific currency falls significantly, traders that rely on leverage open themselves up to margin calls, which can force them to sell off their securities. Other than losses, transaction costs can also reduce the profit.
To become a successful Forex trader, you need to be skilled and extremely sharp, as there are many obstacles, and the risk of fraud and misinformation is high.
Conclusion
In this article, we have taken an in-depth look into currency futures and tried our best to answer the following questions:
- What is currency futures?
- Basics of currency futures?
- How do currency futures work?
- Finally, are currency futures worth investing in?
Compared to other elements of the Forex market, it is safer to invest in the currency futures because they are traded in a regulated exchange market and have no additional costs.
However, traders must first thoroughly understand the basics of currency futures, fulfill all the requirements, make sure that they have sufficient capital in their trading account, and then make their move.