October 16, 2017
Forex futures is a derivative of the Forex market. However, the volume of Forex futures trading is about 1% of the total Forex market. This market operates in much the same way as traditional futures, such as for commodities: The futures are purchased on a contract, which specifies the currency pair(s), the amount, the date of purchase, and the price of the purchase on that date.
How Forex Futures Work
Although the Forex market is not centralized and is operated from various countries around the world, the majority of Forex options, including futures, are traded through the Chicago Mercantile Exchange (CME) and its partners, including brokerages.
Currency futures trading was introduced in 1972 by the CME. Due to the lack of access to the interbank exchange markets that some commodity traders suffered, the International Monetary Market (IMM) was created in the same year. The IMM is now a division of the CME, which averaged 754,000 futures contracts per day, according to 2009 reports.
Technically, when trading Forex futures, the trader is no longer trading over-the-counter (OTC). Futures are offered only in whole numbers, unlike the spot market. It’s also important to note that all futures quotes on the Forex calendar are made against the U.S. dollar (USD).
Once you decide to trade Forex futures, your broker will give you the specifics on the transaction: contract size, time line, pip spread, pricing limits, etc. The option to hedge or speculate on the trade should be detailed in the contract as well. Signals also come into play here. The best Forex signals may or may not include futures signals, so examine the signal software you choose, carefully.
Hedging vs Speculating Forex Futures
Hedging and speculating are quite common on the Forex futures market. Hedging is used to neutralize or mitigate the effect that fluctuations in the currency market have on international revenue. On the other side of the coin, speculating is a way for traders to maximize profit potential by incurring more risk.
The Forex market alone is not without risk; the Forex futures market can involve even more risk. Although not recommended for beginner Forex traders, it pays to understand all derivatives of the Forex to get a better grasp on the market as a whole, and to be able to anticipate trends.