An Introduction To Trading Forex Futures

The global currency market has an average daily trading volume of more than $ 5 billion, making it one of the largest markets in the world.1 Within this market there is a growing class of derivative securities: futures contracts. currency foreign exchange market today. This article defines and describes these futures contracts and their common uses, as well as some of the analytical tools required to successfully trade a contract in the forex futures space.



What are Forex futures?

Forex futures contracts are futures contracts to buy or sell currencies at a specific date, time, and contract size. These contracts are traded on one of the many futures exchanges in the world. Unlike your futures contracts, futures contracts are publicly traded, cannot be adjusted (standardized in terms of fixed contract size and settlement procedure), and are hedged against credit losses by an intermediary called a credit chamber forex trading platform in India. Compensation. The clearinghouse provides this guarantee through a process in which daily accumulated gains and losses are converted into actual cash losses and credited or debited to the account holder. This process, known as market valuation, uses the average of the last trades of the day to calculate a settlement price. This settlement price is then used to determine whether a profit or loss has been generated on a forward account. In the period between the previous day's settlement and the current settlement, profit and loss are based on the last settlement value.

Futures Margins

Futures clearing houses require participants to make a deposit called margin. Unlike the margin on the exchange, which is a loan from a broker to the client based on the value of his current portfolio, the margin on the futures market is related to the amount of money initially deposited to meet a minimum requirement. No loans are required, and this margin serves as a good-faith way to ensure that both parties to a transaction are doing their part. Also, the initial margin required for futures contracts is usually less than the margin required in a stock market. If an account loses money after the daily market price valuation, holders of futures positions should ensure that they keep their margin levels above a predetermined amount. known as the maintenance margin about foreign exchange market. If accumulated losses bring the account balance below the maintenance margin requirement, the trader will receive a margin call and must deposit the funds to return the margin to the original amount. You can find an example of the margin requirements for each type of contract on the Chicago Mercantile Exchange or on the CME website here (more on CME below).

The Exchanges

Forex futures are traded on stock exchanges around the world. One of the most popular exchanges is the Chicago Mercantile Exchange (CME) group. Forex, like most futures contracts, can be traded on an open Cree system via live traders on a pit floor or entirely electronically with a computer and internet access. The clamor has been largely abolished in Europe and replaced by electronic commerce. As mentioned above, the CME Group is the leader in terms of the number of derivatives contracts traded with an average daily volume (ADV) of 19.1 million contracts in 2020.2 Most of the currency forward contracts are traded through the CME Group and its intermediaries. negotiated.



Contracts Specifications and the Tick

Each futures contract has been standardized by the stock market and has certain characteristics that can distinguish it from other contracts. For example, CAD / USD futures contracts are physically delivered on settlement day, standardized in size to CAD 100,000, and traded for 20 months based on the March quarterly cycle (i.e. March, June, September, and December). However, the greatest interest for traders would be the fluctuation of the minimum price, also known as a tick best brokers in India for forex. A tick is unique to each contract and it is imperative that the trader understands its characteristics. For the CAD / USD contract, the minimum tick or price movement up or down is $ 0.0001 per Canadian dollar increment. For a standard C $ 100,000 contract, this means a move of US $ 10 in each direction. That is, if the Canadian dollar appreciated from $ 0.78700 to $ 0.78750, a short seller would have lost 5 ticks or $ 50 per contract.

Types of Uses: Hedging 

Forex futures contracts are widely used for both hedging and speculative activities. Let's take a brief look at an example of using currency futures to mitigate currency risk. An American company operating in Europe expects a payment of 1,000,000 euros for services provided in five months. For example, imagine that the current EUR / USD spot rate is currently at $ 1.04. Fearing that the euro will deteriorate further against the dollar, the company can hedge this next payment by selling futures contracts of eight euros at $ 125,000 each, which will expire at $ 1.06 per euro in five months. Over the next five months, as the euro continues to depreciate against the dollar, the clearinghouse will credit the company's account daily.

Types of Uses: Trading and Speculating


As with the stock market, the types of trading methods used depend on individual preferences for techniques and timing. Daily traders generally do not hold positions overnight and can enter and exit a trade in a matter of minutes to jump into an intraday swing. Mine. focuses on price and volume movements with a strong emphasis on technical analysis as opposed to fundamental factors. A forex futures trader primarily uses the main technical indicators that are prevalent in the spot markets, such as Fibonacci patterns, Bollinger Bands, MACDs, oscillators, moving averages, trend line patterns, and support and resistance zones.

Types of Analytical Tools

Similar to the stock market, currency futures traders use both technical and fundamental analysis. By its very nature, technical analysis studies price and volume data, and therefore similar methods are prevalent in both equity and futures markets. However, the biggest analytical contrast between currency traders and, for example, stock traders, is in the way they apply fundamental analysis. Fundamental stock market analysis can focus on accounting auditing, management analysis and meetings, efficiency analysis, relationship analysis, and industry analysis of a company. The broader macroeconomic principles can be relegated to the specific characteristics of companies, says the analyst. However, forex futures (and currencies in general) traders must be thoroughly familiar with macroeconomic principles and forecasting techniques.

A Brief Example

Suppose that after looking at the technicalities and volatility surrounding Greece's future in the Eurozone, a trader takes a bearish position on EUR / USD and decides to short the June 2015 Euro contract. They sell the June contract. to $ 1,086 with the hope that the euro will. at least it depreciates to its short-term support before expiration (around $ 1.07260). With a contract size of 125,000 euros, he can win 134 ticks or $ 1,675 if his trade is successful ((1.0860-1.07260) x 125000). With a minimum margin requirement of $ 3,100 x 1.10 (CME rules require 110% of the minimum margin requirement for speculative trading), his initial margin would be $ 3,410. If he takes his profit of $ 1,675 and divides it by the margin of $ 3,410, they get a 49% leverage return.

The Bottom Line

Forex futures trading, like any speculative activity, is inherently risky. The trader must have at least a sufficient knowledge of technical and macroeconomic analysis and understand the unique characteristics and trading rules of a contract. Transparency, liquidity, and lower risk of default make currency futures contracts attractive. However, the trader must respect the power of margin to amplify losses (as well as profits), exercise due diligence, and have a proper risk management plan in place before placing their first trade.

Contact us