Futures Currency Trading
February 25th, 2011
Futures Currency Trading
OK. So you have a grip on the basics of forex now; the buying and selling of pairs of currencies with the desperate hope that the market moves in your favour and you make some money. But what about futures, how do these differ from normal forex trading?
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The forex market is huge and eclipses all stock exchanges by far; its total value traded daily is around £1.8 trillion. Futures make up only a small proportion of the forex trades, with around one hundredth of a market share.
Futures are a way of trading that can be applied to many types of trading, not just forex. Put simply, it is a contract to make a sale at an agreed price on a specified future date. If the price of the item being bought is higher than defined in the contract then yippee! you have made a profit. If the price is lower than you have agreed to buy it for, then money will have been lost on the deal.
The principles are very easily transferred to forex, with traders predicting which way the market is going to travel and agreeing to a contract which offers them the currency at a price which they think will be profitable to them. Despite being a less common form of forex trading, futures are not the new kid on the block that it may seem to be, having been around since 1972. As trades are conducted through a centralised exchange, futures dealing is well regulated with data easily accessible.
The same principles as standard forex trading apply, with the bid/ask crucial to how profitable any deal is likely to be. However, the bonus of futures is that the spread is often very much lower. Leverage is also likely to be much greater with ratios in the region of 200:1 not uncommon.
All sound great so far? But there are downsides to take into account. Futures is a much more technical way of trading so it is not the place to start if you are new to forex. Learn to spot trade before considering moving up to futures as an in-depth knowledge of how the markets move will help prevent a wipe-out. In the unpredictable world of forex, nothing is guaranteed except the fact that every dealer will lose on some trades so every advantage is needed. A larger deposit is likely to be required than straight forward forex dealing and this is due to the size of the leverage. And speaking of leverage…whilst large amounts of leverage mean bigger deals, they also mean potentially bigger losses and can wipe out whole accounts within seconds if the market moves the wrong way. Futures are also restricted to when they can trade due to the centralisation and dealing limitations in order to keep it so tightly regulated.
Futures are a great way to find a new challenge in the world of currency trading and offer potential for huge gains for an experienced trader with a bit of knowledge…and as always, a huge dollop of luck.
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