The FX market is among the world’s largest markets to trade currencies. Almost $6.6 trillion in trade takes place through the forex market. The currency prices always keep speculating in the forex to gain potential profit. A class of derivative securities is growing within the forex market known as Forex future.
This article discusses the forex future, future contracts, some tools to negotiate these contracts, and the famous applications of future contracts. The question always arises about how to trade forex for beginners and use future contracts to gain profit in trading; keep reading the article to know its answer.
Table of Contents
What are the Forex Futures?
Forex Futures are standardized contracts for trading foreign currencies at a specific contract size, date, and time. It obligates the buyer and seller to do transactions on time. These forex futures contracts are traded at many futures exchanges throughout the world.
These future contracts are traded publicly and are non-customizable. In addition, they guarantee against credit loss through the clearinghouse. The clearinghouse is an intermediary between buyer and seller, which validates and finalizes transactions.
Clearinghouse guarantees through a mark-to-market process, which converts the daily forex gain and loss into actual cash loss credited to the account holder. This process is used to estimate the settlement price.
Further, the settlement determines the gain or loss in the future account. However, the last settlement value provides an estimate of gain and loss. One of the popular future exchanges is the Chicago Mercantile Exchange. Let’s see some important terms for understanding the forex futures.
Future Margins
In the Future clearinghouse, the participant invests deposits in forex, known as margin. A margin in a futures market refers to the initial money deposit to meet the trading requirements. Unlike stock marketing, there is no borrowing involved in forex. Also, the initial margin of forex is less than the stock capital.
The future account holders must maintain the margin levels above the predesignated amount. The broker will give a margin call if the loss is below the maintenance margin. The basic requirements for each future contract are present on the Chicago Mercantile Exchange.
Contacts Specifications
Each future contract has specific characteristics that distinguish it from others. The exchange standardizes its contracts. For instance, CAD/USD futures standardize by 100,000 Canadian dollars by size and trade for twenty months based on the quarterly march cycle.
The minimum price fluctuations in each contract are known as tick which is unique for each future contract. The tick is $.0001 per Canadian dollar increment for CAD/USD contract.
The future market also contains mini-contracts which include E-minis and half of the regular contract. The E-minis future contracts are perfect for novice traders due to increased liquidity and low margin requirements.
The Exchange
The exchange is used for trading future contracts. The prominent exchange used for this purpose is the Chicago Mercantile Exchange group. The estimated average contracts traded by the CME Group are 19.1 million. It means the majority of futures contracts are traded through this group.
Use of Forex Futures
The forex trading future is mainly used for hedging and speculating activity. Let’s briefly explain both of these:
Hedging:
Hedging is the method to protect against losses. The importer of the foreign currency pairs can hedge risks by buying the USD-INR futures. As the rupee’s worth goes down, the dollar will appreciate, and the value of the USD-INR pair will increase.
Speculating
Generally, day traders never hold the positions overnight. Their positions keep changing within minutes. Future day traders use technical indicators such as Bollinger Brads, oscillators, MACD, Fibonacci patterns, and trend line chart patterns.
In contrast, swing traders hold their positions in forex overnight for up to one month. They employ longer time frame technical analysis or short-term macroeconomic factors.
The future position traders hold their positions from months to many years. They employ wider stop-losses and different risks from the day and swing traders. They prefer macroeconomic factors over technical analysis. They use the technical analysis tool to build entries, exits, and sweep stop-losses.
Analytical Tools Use For Future Contracts
The foreign exchange or FX market future traders use fundamental and technical analysis, just like the stock market. The technical analysis methodologies are the same for stock and futures markets. Moreover, technical analysis is fundamentally used to inspect price and volume.
The difference between the future and the stock market comes when we move toward fundamental analysis. In stock marketing, the fundamental analysis examines the accounting system, management discussion, industry analysis, and others. It doesn’t emphasize macroeconomic analysis.
In contrast, future market traders are well-familiar with macroeconomic analysis principles and forecasting techniques.
Key Principle that Traders Must Understand
Future forex traders need to understand many factors which affect the country’s currency and interest rates. In addition, they should also understand the chief determinants of the business cycle and carefully analyze the economic indicators such as GDP, CPI, housing, employment, yield curve, and many others.
Moreover, the trader must be able to examine the microeconomic accounting principles. For instance, the level of reserves of the central bank, capital account superfluidity, and shortfall. They must study the reasons and outcomes of speculation of the currency pairs.
Forex futures traders must know the effect of geopolitical tensions on the trading currency pairs. For instance, the political conflict between Crimea and Russia affects the price of commodity dollars.
However, the fundamental analysis of forex futures always deals with the general relationship of the market and a broader view of the world. The novice traders first get adequate knowledge about future contracts, analytical tools, main principles of the technical and fundamental principles, and macroeconomic analysis.
Final Verdicts
Trading forex future is speculating activity and is riskier in nature. The beginners must know the technical and macroeconomic analysis. Moreover, they also understand the exchange-related rules and regulations and future contract properties. Future forex trading attracts the trader due to its transparency, lower risk, and liquidity. Moreover, If you are a novice, you must have a risk management plan to make your trade successful.
