Currency Futures Trading

Currency futures trading is a complex system that requires experience in Forex trading, and an understanding of the market in general. Learn more about the machinery that powers this intriguing way to trade.

Currency futures trading is more complex than the more well-known ‘spot Forex trading’ that many traders work with. Futures contracts are not direct securities, like stocks or bonds. Rather, they are an exchange traded derivative contract. Currency futures are a derivative of the Forex market where the underlying commodity being traded is a currency exchange rate rather than the actual currency itself. These are quite complex financial tools used by investors or traders to either speculate for intended profit or to hedge against a perceived foreign exchange risk.

Put very simply, a currency futures contract is written when an investor wishes to exchange a base currency for another foreign currency at a point in the future, but at a currency exchange rate that is determined and fixed on the day the contract is purchased.

This means that an investor is able to fix the price of a currency at today’s rates, but not have to actually purchase that currency until the expiration date of the futures contract. Traders and investors are able to close out the contract at any time prior to the expiry date on the contract, which means they’re not actually required to purchase any currency at all to effectively make the trade.

The basis behind the vast majority of futures investing is to try and offset any perceived, unpredictable volatility in the price of a security asset. Futures contracts can be drawn up for commodities markets and include raw materials such as gold or wheat, or for currency prices or even interest rates.

Example of How Currency Futures Work

Let’s assume that an Australian wheat farmer wants to sell $1 million worth of Aussie wheat to America. The farmer knows he needs AUD $1 million to cover costs and profits, so he needs a way to guarantee that the amount of US dollars paid by the customer in America will still be worth the same amount when the wheat is delivered as it’s worth today.

The farmer can purchase a currency futures contract that will allow him to fix the exchange rate at today’s rates, but the contract expiration date is due at the same time as the cars are delivered overseas.

This way, the farmer in this example knows he’s still going to get the same amount of money, regardless of what the currency exchange rates are doing at that point in the future.

Currency Futures Trading for Speculation

Of course, most traders in the futures markets aren’t actually selling wheat to overseas buyers. They’re in the market to generate a profit.

The strategies used by Forex futures traders are very similar to the strategies used in the spot Forex markets. The most predominant strategies for choosing likely winning trades are usually based on technical chart analysis, as futures markets tend to show clear trend lines well.

The object of speculating on futures contracts is to purchase the contract at a fixed price with a defined expiry date in place. During the contract period, the price of that currency will fluctuate. It’s this price variance that allows a good futures trader to create profits or losses, depending on how the market moved during the contract period.

Currency Trading Futures for Hedging

While day traders have almost no interest at all in the underlying asset behind the futures contract, hedgers are often very involved in the supply or delivery of the security asset involved.

This is where the previous example of the farmer may fit into the equation, as he may need to buy a currency futures contract to safe-guard against changing exchange rates to ensure his own business success.

Currency futures trading just for profit can be very lucrative, but it’s imperative that you spend time understanding the market and how it works before you dive in.

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4. Making Money With Commodity Futures Trading
5. Compare Forex with Currency Futures Options
6. Novice Introduction To The Futures Trade