How to trade forex futures contracts?

• Open an account to trade CFDs on the FX market.
• Pick the currency pair you want to trade.
• Choose the way to trade your FX pair – forwards, spot or options.
• Place your trade.

Forex futures are standardized futures contracts to buy or sell currency at a set date, time, and contract size. These contracts are traded at one of the numerous futures exchanges around the world. Unlike their forwards counterparts, futures contracts are publicly traded, non-customizable (standardized in their specified contract size and settlement procedures) and guaranteed against credit losses by an intermediary known as a clearinghouse.

The clearinghouse provides this guarantee through a process in which gains and losses accrued on a daily basis are converted into actual cash losses and credited or debited to the account holder. This process, known as mark-to-market, uses the average of the final few trades of the day to calculate a settlement price. This settlement price is then used to determine whether a gain or loss has been incurred in a futures account. In the time span between the previous day’s settlement and the current’s, the gains and losses are based on the last settlement value.

Futures clearinghouses require a deposit from participants known as a margin. Unlike margin in the stock market, which is a loan from a broker to the client based on the value of their current portfolio, a margin in the futures market refers to the initial amount of money deposited to meet a minimum requirement. There is no borrowing involved, and this initial margin acts as a form of good faith to ensure both parties involved in a trade will fulfill their side of the obligation. Furthermore, the futures initial margin requirement is typically lower than the margin required in a stock market.

Should an account take on losses after daily mark-to-market, the holders of futures positions must ensure that they maintain their margin levels above a predesignated amount. known as the maintenance margin. If accrued losses lower the balance of the account to below the maintenance margin requirement, the trader will be given a margin call and must deposit the funds to bring the margin back up to the initial amount.

An example of margin requirements for each type of contract can be found on the Chicago Mercantile Exchange, or CME's website here (more on the CME, below).

Forex futures are traded at exchanges around the world. One of the most popular exchanges is the Chicago Mercantile Exchange (CME) Group. Forex, much like most futures contracts, can be traded in an open out-cry system via live traders on a pit floor or entirely through electronic means with a computer and access to the Internet. Open-outcry has mostly been phased out in Europe and replaced with electronic trading.

As mentioned earlier, in terms of the sheer number of derivatives contracts traded, the CME group leads the pack with an average daily volume (ADV) of 19.1 million contracts in 2020. The majority of forex futures contracts are traded through the CME Group and its intermediaries.

Each futures contract has been standardized by the exchange and has certain characteristics that may differentiate it from another contract. For instance, the CAD/USD futures are physically delivered on the settlement date, standardized by size to 100,000 Canadian dollars, and trades for twenty months based on the March quarterly cycle (i.e., March, June, September, and December).

Of utmost interest to traders, however, would be the minimum price fluctuation, also known as the tick. A tick is unique to each contract, and it is imperative that the trader understands its properties. For the CAD/USD contract, the tick or the minimum price movement up or down is $.0001 per Canadian dollar increment. With a contract standardized at 100,000 Canadian dollars, this translates to a $10 move each way. That means if the Canadian dollar appreciates from .78700 USD to .78750 USD, a short seller would have lost 5 ticks or $50 per contract.

In contrast to the CAD/USD futures, the CHF/USD contract has a contract size of 125,000 Swiss francs. The tick, in this case, is $.0001 per Swiss franc increments or $12.50/contract.

The futures markets also feature mini-contracts at half the standard of the regular contract and the E-Minis, which are 1/10th the size of their regular counterparts. E-minis are ideal for new traders because of their increased liquidity and accessibility due to the lower margin requirements. The contracts trade 23 hours a day, Monday to Friday, around the world.

Forex futures are used extensively for both hedging and speculating activity. Let's briefly examine an example of using FX futures to mitigate currency risk.

An American company doing business in Europe is expecting to receive a payment of €1,000,000 for services rendered in five months’ time. For the sake of the example, imagine that the prevailing spot EUR/USD rate is currently at $1.04.

Fearing further deterioration of the euro against the dollar, the company can hedge this upcoming payment by selling eight euro futures contracts, each containing €125,000, expiring in five months at $1.06 dollars per euro. Over the course of the next five months, as the euro depreciates further against the dollar, the company’s account is credited daily by the clearinghouse.

After the time has elapsed and the euro has fallen to $1.03, the fund has realized gains of $3,750 per shorted contract, calculated by 300 ticks (at a minimum price move per tick at $.0001) and a multiplier of $12.50 per contract. With eight contracts sold, the firm realizes total gains of $30,000, before accounting for clearing fees and commissions.

If the American company in the example had not entered this trade and received euros at the spot rate, they would have had a loss of $10,000: $1.04 EUR/USD spot five months prior to futures expiry, and $1.03 spot at futures expiry translates to a loss of $10,000 per €1,000,000.

As with the equities market, the types of trading method are dependent upon the unique preferences of the individual when it comes to both techniques and time frames.

Day traders generally never hold positions overnight and can be in and out of a trade within a matter of minutes seeking to jump on an intraday swing. A day trader’s M.O. is centered around price and volume action with a heavy emphasis on technical analysis as opposed to fundamental factors. A forex futures day trader primarily employs the main technical indicators prevalent in the spot markets, such as Fibonacci patterns, Bollinger Bands, MACD, oscillators, moving averages, trend lines chart patterns, and support and resistance areas.

Many, if not all the aspects of technical analysis for equities can be interchangeable with the futures market, and thus, trading between the two asset classes can be an easy transition for day traders.

Swing traders are traders who hold positions overnight, for up to a month in length. They generally employ technical analysis spanning a longer time frame (hourly to daily charts), as well as short-term macroeconomic factors.

Finally, there are the position traders who hold onto a position for multiple weeks to multiple years. For these individuals, technical analysis may take a back seat to macroeconomic factors. Position traders are not concerned with the day-to-day fluctuations in the contract prices but are interested in the picture as a whole. As such, they may employ wider stop-losses and differing risk management principles than the swing or day trader.

Note, however, these are generalized definitions and the differentiating characteristics of traders are not black and white. At times, day traders may employ fundamental analysis, such as when Federal Open Market Committee data is released.

By the same token, position traders may employ technical analysis tools to set up entries, exits, and trailing stop losses. Furthermore, the time-frames utilized by traders are also quite subjective, and a day trader may hold a position overnight, while a swing trader may hold a position for many months at a time. Much like in the equities markets, the type of trading style is entirely subjective and varies from individual to individual.

Similar to the equities market, traders of FX futures employ both technical and fundamental analysis. Technical analysis by nature examines price and volume data, and subsequently, similar methodologies are prevalent across both the equities and the futures markets.

However, the biggest analytical contrast between the FX trader and say, a stock trader, will be in the way they employ fundamental analysis. Fundamental analysis in the stock market may emphasize scrutinizing the accounting statements of a firm, management discussion and analysis, efficiency analysis, ratio analysis, and industry analysis. Depending upon the analyst, broader macroeconomic principles may take a backseat to company-specific characteristics. However, traders of FX futures (and FX in general), must be absolutely familiar with macroeconomic principles and forecasting techniques.

The budding FX futures trader must understand the plethora of factors that can affect a country’s currency, such as the causes and effects of inflation/deflation, as well as the countermeasures available to a country’s central bank, and interest rate differentials. The trader must understand the principal determinants of business cycles within a country, and be able to analyze economic indicators, including (though not limited to), yield curves, GDP, CPI, housing, employment, and consumer confidence data.

Furthermore, the trader must be able to analyze macroeconomics accounting principles, such as a central bank’s level of reserves, current/capital account surpluses, and deficits, as well as study the causes and outcomes of speculative attacks on currency, for example, both the Bank of England Mexican and Thai currency debacles make for interesting case studies.

Finally, the trader must also be familiar with the effects of geopolitical turmoil on a country’s currency, such as the conflict in Crimea and the subsequent sanctions lobbied against Russia, as well as the effects of commodity prices on what is called commodity dollars.

For example, both the Canadian and Australian dollar are susceptible to movements in the prices of commodities- namely those associated with energy. If a trader feels that oil will experience further declines, they may short CAD futures, or take on a long bet in the hopes of an oil rebound. Again, fundamental analysis for FX futures always concerns itself with the broader view of the world and the general relation of the markets.

Let's assume that after checking the technicals, and the volatility surrounding Greece's future in the eurozone, a trader takes a bearish position on the EUR/USD and decides to short the euro June 2015 contract. They short the June contract at $1.086, hoping that the euro will depreciate to at least where near-term support lies prior to expiration (around $1.07260).

With a contract size of 125,000 euros, they stand to gain 134 ticks, or $1,675 if their trade is successful ((1.0860 - 1.07260) x 125000). At a maintenance margin requirement of $3,100 USD x 1.10 (CME rules require 110% of the maintenance margin requirement for speculative trades), their initial margin would be $3,410. Taking their profit of $1,675 and dividing by the margin of $3,410, gives them a leveraged return of 49%.

Currency futures contracts also referred to as foreign exchange futures or FX futures for short, are a type of futures contract to exchange a currency for another at a fixed exchange rate on a specific date in the future.

Since the value of the contract is based on the underlying currency exchange rate, currency futures are considered a financial derivative. These futures are very similar to currency forwards however futures contracts are standardized and traded on centralized exchanges rather than customized.

Currency futures are standardized contracts that trade on centralized exchanges. The futures are either cash-settled or physically delivered. Cash-settled futures are settled daily on a mark-to-market basis.

As the daily price changes, the differences are settled in cash until the expiration date. For futures settled by physical delivery, at the expiration date, the currencies must be exchanged for the amount indicated by the size of the contract.

Foreign exchange futures contracts comprise several components outlined below:

Since currency futures are traded on centralized exchanges and through clearinghouses, and margins are put into place, this vastly reduces counterparty risk compared to currency forwards. A typical initial margin can be around 4% and a maintenance margin around 2%.

Like other futures, foreign exchange futures can be used for hedging or speculative purposes. A party who knows they will need a foreign currency at a future point, however, does not want to purchase the foreign currency at this point in time may buy FX futures. This will act as a hedged position against any volatility in the exchange rate. At the expiration date when they need to buy the currency, they will be guaranteed the FX futures contract’s exchange rate.

Similarly, if a party knows that they will receive a cash flow in the future in a foreign currency, they can use futures to hedge this position. For example, if a company in the US is doing business with a country in Germany, and they are selling a large item payable in euros in a year, the US company may purchase currency futures to protect against negative swings in the exchange rate.

Currency futures are also often used by speculators. If a trader expects a currency to appreciate against another, they can buy FX futures contracts to try to gain from the shifting exchange rate. These contracts can also be useful for speculators because the initial margin that is held will generally be a fraction of the size of the contract. This allows them to essentially lever up their position and have more exposure to the exchange rate.

Currency futures can also be used as a check for interest rate parity. If interest rate parity does not hold, a trader may be able to employ an arbitrage strategy to profit purely from borrowed funds and the use of futures contracts.

Investors looking to hedge a position often use currency forwards due to the ability to customize these over-the-counter contracts. Speculators often use currency futures due to the high liquidity and ability to leverage their position.

Let us now look at an example that involves currency futures. Say you purchase 8 future Euro contracts (€125,000 per contract) at 0.89 US$/€.  At the end of the day, the settlement price has moved to 0.91 US$/€. How much have you lost or profited?

The price has increased meaning you have profited. The calculation to determine how much you have profited is as follows:

(0.91 US$/€ – 0.89 US$/€) x €125,000 x 8 = 20,000 US$

Thank you for reading CFI’s article on currency futures. If you would like to learn about related concepts, check out CFI’s other resources:

It’s not just the stock market. The forex market also boasts of a bunch of advantages over the futures market, similar to its advantages over stocks.

But wait, there’s more… So much more!

In the forex market, $6.6 trillion is traded daily, making it the largest and most liquid market in the world.

This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market.

The futures market trades a puny $30 billion per day. Thirty billion? Peanuts!

The futures markets can’t compete with its relatively limited liquidity.

The forex market is always liquid, meaning positions can be liquidated and stop orders executed with little or no slippage, with exception to extremely volatile market conditions.

At 5:00 pm EST Sunday, trading begins as markets open in Sydney.

At 7:00 pm EST the Tokyo market opens, followed by London at 3:00 am EST.

And finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST.

As a trader, this allows you to react to favorable or unfavorable news by trading immediately.

If important data comes in from the United Kingdom or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride.

Overnight markets in futures contracts do exist, and while liquidity is improving, they are still thinly traded relative to the spot forex market.

With Electronic Communications Brokers becoming more popular and prevalent over the past couple of years, there is the chance that a broker may require you to pay commissions.

The competition among spot forex brokers is so fierce that you will most likely get the best quotes and very low transaction costs.

When trading forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution.

The prices quoted by brokers often represent the LAST trade, not necessarily the price for which the contract will be filled.

Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account.