The forex futures market is a derivative of the general forex market. This market is only a 1/100th of the size of the overall market but does have its own strategies. It is best that you know the difference between the traditional futures market and the forex futures market as well as the trading strategies you can use.
Forex Futures vs Traditional Futures
The manner in which the traditional and forex futures markets work is basically the same. The trader purchases a contract to sell or buy an asset at a predetermined date for a set amount. Of course, there is a difference between the traditional and forex futures. This is that forex futures cannot be traded on the exchange, but rather from a different exchange in the US or around the world. Most of the forex futures which are traded are done through the Chicago Mercantile Exchange.
For a futures contract the broker needs to provide you with all the specifics from the contract size to the trading hours, time increments and pricing limits. The manner in which this information is given to you may vary in presentation depending on the broker you are using.
Hedging and Speculation
There are two ways that forex derivatives are used on the futures market and they are hedging and speculation. Hedge traders use futures as a means of reducing their risk by padding against any future currency price movements. One the other hand, speculators actually increase risks in order to make a profit. It is best at you have an in-depth look at each of these strategies before you try using them.
There are a lot of reasons why people use a hedging strategy when trading of the forex futures market. The main reason is to limit the effect of fluctuations in currency price on sales. This means that a business operating in the UK wants to know how much they will make in US dollars from all its European stores. To do this they purchase a futures contract for the amount of predicted sales to eliminate differences based on currency fluctuations.
When completing hedging the trader will be faces with futures and forwards. These are actually two different financial assets. Forwards offer the trader increased flexibility when it comes to setting dates and contract sizes. The cash amount for the forward is not due until after the expiration of the forward contract.
Speculations are profit driven by nature and have a number of advantages and disadvantages. The advantages you get are lower spreads of 2 to 3, lower costs per transaction as you can purchase a contract for as little as $5 and more leverage as you can get $500+ leverage per contract.
The disadvantages of these are the high capital amounts you have to have, the limited trading sessions and the NFA fees which may apply. The futures market is not open all the time because traders are completed through a physical exchange. The lot sizes are often $100,000 which requires a large capital inlay.
The strategies used to identify profitable trades are similar to the ones used on the spot market. Technical analysis such as Fibonacci studies and pivot points are commonly used.