Beginners Guide to Forex Futures Trading

Forex futures trading allows you to profit from slight price movements in fiat currencies. Traders look at global economics, government policies, changes in consumer behavior, and other indicators to gauge which currencies will become more valuable in the future. Forex futures trading offers liquidity and leverage, two perks that have attracted many investors. This beginner’s guide to forex futures trading will highlight everything you need to know about this opportunity.

What are Forex Futures?

Forex futures are contracts in which both parties agree to exchange currencies at a predetermined price on a specific date. Someone who will travel to Europe next year can use a forex futures contract to lock up the current EUR/USD exchange rate. 

If the Euro appreciates against the dollar, the trader realizes a profit, and the vacation becomes more affordable. However, the forex trader with the Euro contract will lose money if the Euro depreciates compared to the U.S. dollar.

Some investors trade forex futures before their corporation’s revenue recognition from one currency to another. Forex futures trading also attracts speculators who aim to profit from slight fluctuations in the value of fiat currencies.

Futures Margins Explained

Futures margin allows you to borrow money to initiate positions. The money you must put down equals a percentage of the contract’s value. Some futures contracts and brokerage firms require a higher initial margin than others. It’s similar to obtaining a down payment for a real estate property. 

However, brokers can force you to sell your futures contracts if your balance gets too low. Margin calls occur if the investor’s account equity falls below the maintenance margin. Most brokers give a warning when you get close to your maintenance margin. You can deposit additional cash into your brokerage account to avoid a margin call.

Margin gives you more buying power with futures contracts. You can make more money with margin, but your losses will also increase if you’re on the bad end of a trade.

Why Trade Forex Futures?

Forex futures contracts allow you to profit from fluctuations in fiat currencies. Investors look for ways to grow their money, and forex futures can work for them. Margin trading allows you to get more mileage from your money when trading futures contracts in forex. 

Furthermore, these markets are open throughout the day on weekdays. You can profit anytime, while the stock market closes at 4 p.m. Eastern and after-hours trading shuts down at 8 p.m. Eastern.

Forex futures traders can also short currencies as a hedge. For instance, a trader may go for long EUR/USD forex futures contracts and short GBP/USD forex futures contracts. The hedge minimizes losses if the U.S. dollar strengthens against both currencies. You can also profit from this hedge if the British Pound goes down more than the Euro.

Getting Started with Forex Futures

Diversifying your portfolio to include forex futures can help you capitalize on more opportunities. You must first compare brokers and choose the right one for you. Then, you will have to set up a trading account with them.

Some forex traders also use advanced trading software, which gives them access to valuable data points much quicker. The MetaTrader platform is one of the most popular choices, and its recent MT5 upgrade offers more features than the MT4 platform.

When comparing brokers, you should check the fees, which futures contracts they let you trade, online reviews for their customer support, margin rates, and other details. Reviewing multiple brokerage firms gives you a better idea of what features you need for your forex trading experience.

Contracts, Specs, and Ticks: Breaking Down the Essentials

Futures contracts are agreements traders make regarding currency exchange rates. Each contract includes specs, which detail the agreed-upon currency exchange rate. Contract specifications also include a contract’s lot sizes, expiration date, and trading hours. 

While the contract’s specs remain the same, its value changes as the value of each fiat currency changes. For instance, a EUR/USD futures contract will lose value if the U.S. dollar appreciates faster than the Euro. 

Traders look at recent forex market ticks to gauge the sentiment for specific fiat currencies. Ticks represent the smallest possible price movement a forex futures contract can have. A higher tick can indicate heightened exchange rate volatility.

Hedging with Forex Futures

While trading currency derivatives like forex futures can be profitable, investors also run the risk of the trade going the wrong way. A good solution to minimize your losses is to use good hedging strategies. 

A trader can initiate a long position with one currency pair and short a futures contract for a similar currency pair. The idea is that if your long position loses significant value, your short position should compensate. 

However, forex trading strategies that rely on hedges will also reduce your gains if your intended trade moves in the right direction. That’s because the short position will lose value as the long position appreciates. Furthermore, you will incur additional trading fees for hedging your positions.

Trading and Speculating with Forex Futures

Traders can enter a long position with a forex futures contract if they believe a specific fiat currency will appreciate over time. Speculators who believe a currency will lose value can short forex futures contracts that expose them to that currency.

Traders use fundamental and technical analyses to gauge which positions to enter. Fundamental analysis focuses on political events, economic developments, and historical trends around a currency’s issuer. Technical analysis places a stronger emphasis on charts and indicators to assess entry and exit points. 

Fundamental and technical analyses can help you make well-informed decisions. However, the investment thesis can change at any moment. Fundamental and technical analyses rely on lagging indicators and past events to guess how the future will unfold. Predicting the future is hard, and being wrong can result in losing money.

Tapping into Forex Futures Trading for More Profits

Forex futures trading has the potential to boost your returns. These derivatives contracts allow you to benefit from fluctuations in currency prices. You can go long on a position or set up a hedge to minimize losses if the trade moves against you. 

Frequently Asked Questions