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Currency Futures Trading

Updated on March 17, 2010

You may be wondering what currency future trading is.  My guess is that you have probably heard about it from a friend or stumbled across a website that may have mentioned it.  Whatever the case is, if you're looking for a solid breakdown on what currency futures trading is, then you have come to the right place.

Investopedia describes it as, "A transferable futures contract that specifies the price at which a specified currency can be bought or sold at a future date."  To further clarify, they explain currency futures as, "Currency future contracts allow investors to hedge against foreign exchange risk. Since these contracts are marked-to-market daily, investors can--by closing out their position--exit from their obligation to buy or sell the currency prior to the contract's delivery date."

Essentially, it boils down to setting a buy and sell level in the foreign currencies market, so that you buy and sell at a level that is making you a profit.  Since most market fluctuate, and the currency markets fluctuate even more, it is nice to have this option in place.

So What Are Currency Futures?

Although I provided the definition above, it may not be clear to some people still.  It is essential a contract or a commitment that you will either buy or sell the currency that you are currently trading, at the specified price.

The currency trading market works similar to the stock market, except that you are trading the various currencies and how they stack up against other currencies.  Whereas most stocks in the stock market are fairly independent on each other, currencies on the other hand are all inter connected, and a rise on one could mean a decline on another. If you have ever traveled and you've had to exchange your money when going to the place, and exchanging it back to your currency when leaving, you'll have probably noticed the fluctuations yourself.  You'll have either got more for your money or less for your money, and very rarely the exchange rate was the same, especially after a week or so vacation.

These fluctuations happen many times per day, and so when investing in currencies, having the option to be able to buy and sell at a certain point helps to minimize the risk you have when dealing in large sums of money.

Getting Started in Currency Trading

Before you can get started with trading currency futures, and other types of currency trading, there's a few things that you will need. The first is to understand the risk involved. When you are dealing with such volatile currencies you need to watch and study the market a bit before jumping in. While there is definitely potential for huge gains, you also have the chance to lose a lot of money too. When making these kind and other investments, make sure that you do not invest more than you can afford to lose.

If you are going to be day trading futures, then you'll need to start out with some capital.  You'll need around a minimum of $2,500, but it is recommended that you have $10,000 of capital to invest to begin with because you'll have many more options and strategies for trading available to you.

Advantages of Currency Futures Trading

The opposite of trading futures is spot trading where you can buy and sell the currencies on the spot.  Since each one has its advantages and disadvantages over the other, i will break it down for you.

Here are the advantages of currency future trading:

  • If you export, you may want to hedge your bets on the currency fluctuations, to protect yourself and lock in a currency rate so that any downward swings in the currency do not affect you at all.
  • Since currency futures aren't done on the open market, you are afforded more simplicity and more protection.  Futures are done through a regulated and established exchange and they use standard contracts.
  • You have the option to be able to use leverage, and this can definitely allow you to realize more in gains.  But, on the flips side, this can open you up to larger losses.

Disadvantages of Currency Future Trading

There are some disadvantages to doing futures trading when compared with spot trading on the currency market.  Here are some of the:

  • At the time of the trade, you aren't actually getting anything or owning anything, since it is based on a future price.  When spot trading, you're actually purchasing the currency right then.
  • You can't trade 24 hours a day like you can doing spot trading for the currency   Since the future trading takes place at various exchanges, it can only be done during the regular trading hours.
  • You have to pay commission on futures trading.  Since you are getting the benefit of choosing the buy and sell price, you end up having to pay the extra commission.

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