If you want to trade the forx markets, there are various ways you can do it. You don’t have to stick with the traditional cash market, for example. Instead, you can trade inthe Forex Futures market.
What are Forex Futures?
Forex Futures offer a more standardized way of trading than the cash markets. They are traded in specific “lot” sizes, on a regulated exchange, the largest of which is the CME (Chicago Mercantile Exchange). Unlike the cash forex market, which is traded round-the-clock, forex futures are traded during fixed sessions. All transactions are cleared by a central counterparty (the exchange clearing house) and instead of being traded at “spot” (i.e. the cash price right now), they are traded at the price the currency combination is expected to settle at on the fixed settlement date in the future.
Regulated Market
Photo by delrandallForex futures trading is more heavily regulated than cash trading. The exchange sets all the rules regarding settlement, contract sizes (i.e. lot sizes), trading hours and deposits or margins
Deposits and Margins
Forex futures are highly leveraged instruments, which means that when you trade, what you are actually buying or selling is the promise to deliver a certain amount of a certain currency at a certain time in the future. Because these amounts can be quite big, you need to pay a deposit (or Initial Margin) when opening a trade. As long as you hold your postion open, if the price moves against you, you have to “top-up” this deposit by paying variation margin, or maintenance margin, to ensure you are covered against future adverse movements.
Leverage
If the price moves in your favor, you can make a lot more with forex futures than you can on the cash markets. The downside of this is that if the price goes in the opposite direction, you stand to lose a lot more. So never risk more than you can afford to lose!
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