Why Every Trader Should Consider Currency Futures | Alfa Financials

Why Every Trader Should Consider Currency Futures

The global currency market is touted to be the largest market in the world with an estimated trading volume of USD 5.3 trillion daily. However, it is not the only vehicle for anybody to partake in foreign exchange. Despite not being as voluminous as the FX market, the currency futures market also generates a stupendous average volume of nearly USD 100 billion. 

Currency futures are essentially futures contracts where the respective instrument is the currency exchange rate and provides exposure to the FX markets like other Futures agreements. They are exchange-traded futures contracts to buy or sell a stipulated amount of a particular currency at a fixed rate and time in the future. Currency Futures were initiated at the Chicago Mercantile Exchange in 1972. Like other Futures products currency Futures are also traded in terms of the contract month whose maturity date usually falls on the third Wednesday of March, June, September and December. 

Currency Futures offer investors the opportunity to trade in the currency market movements with relatively more transparency and regulation. Investors, importers, exporters and travellers use CFs to hedge themselves against fluctuations in the exchange rate. Speculators use CFs to accrue short-term gains on fluctuations in prices while arbitrageurs try to profit from price differentials of similar products in various markets. Few investors trade CFs to improve the performance of a portfolio of assets over the long term.

Let's discuss at length as to why every trader should include CFs in their trading portfolio.

Regulatory oversight :

Most futures brokers including those that offer CFs come under the regulatory oversight of governing authorities like the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) as well as regulations set forth by exchanges. Compared to the currency spot markets currency futures markets have a lot more oversight. Like for instance the CME Group, the largest futures exchange worldwide proffers 49 currency futures contracts and through its market regulation department ensures that all those under it strictly follow its jurisdiction.

Currency Futures exchanges :

CFs are exchange-traded futures. Investors have accounts with brokers that direct orders to the various exchanges to transact in CFs. A margin account is typically used in the trading of CFs or else a huge amount of cash will be needed to initiate a trade. Various brokers have different criteria for starting forex accounts. Generally, CF accounts have a moderate degree of margin(leverage) as compared to other forex accounts that offer even up to 500:1 leverage. The huge leverage for other forex accounts can increase gains but can magnify losses too.

Better opportunity to earn profits :

The Futures market is a highly liquid one and allows investors to make profits from exchange rate volatility as they can speculate as to whether it will strengthen or weaken. Anyone who trades in CFs garners profits based on the price variation at which they buy the contract and they sell it at. With Futures, you can also sell first and then purchase later thereby gaining profit if the price plummets.

Choice of contract types :

A wide array of currency futures contracts are available. There are of course the popular choices such as the EUR/USD besides the E-Micro Forex Futures agreements that trade at 1/10th the size of usual CF contracts, as well as emerging market CFs. Different contracts trade with varying degrees of liquidity. The G10 contracts, the E-mini and the E-Micro contracts are the most widely traded and have the highest liquidity.

Contract Specifications :

Futures contracts, including CFs list specifications like the size of the contract, the minimum price increment and the corresponding tick value. These specifications enable investors to determine the position size and account requirements and the likely profit or loss for different price variations in the contract.

The Currency Futures market clearly enjoys some advantages over other markets but it is important to understand whether it suits your trading style and account size and gives you more bang for your bucks before delving in.

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