The ABCs of currency futures trading includes looking for Action, placing a Bid, and reading the Cycle. Before an investor can do the ABCs, that investor needs to know what currencies are, what futures are and how trading futures works.
The currency market buys and sells the money of different countries. These monies are grouped together in pairs like the Canadian dollar and the US dollar. When an investor buys the Canadian dollar, that investor expects the Canadian dollar to go up and the US dollar to drop in value. The currency market is the largest market in the world and operates from Sunday afternoon through Friday afternoon.
The futures market is buying a contract with delivery to be taken at a future date. This contract will state if the currency pair is going to be bought or sold, the size of the contract and the delivery date. This contract must be exercised at the close of trading on the delivery date. A performance bond will be posted which is unusually between 5 to 15% of the contract amount; this is called the initial margin. These contracts are very closely monitored, and if the price fluctuates too much in the wrong way, additional funds may need to be added. These are called a margin call.
Trading currency futures in the United States is regulated by the Commodities Future Trading Commission (CFTC) which is an independent agency of the government. It sets the rules for the futures contracts and the traders and delivers fines when those rules are broken. The National Futures Association (NFT) handles for actual transactions for the member brokers; brokers must register with both the CFTC and NFT to participate in futures trading. There are over 90 different futures and futures options exchanges around the world.
An investor will simply decide which way the market is going (looking for Action), decide to enter the market (placing a Bid)and collect his profits or take his risk (reading the Cycle). If the investor thinks prices will increase, he will make a play called going long; if he expects the price to decrease, he will go short.
Many investors mistakenly think this futures market is like the options market; there is a major and potentially devastating difference. A futures contract must be purchased. An options contract does not need to be purchased. With the futures contract, both the buyer and seller have agreed to complete the transaction at that stated date in the future.
Many traders successfully use the ABC’s of currency futures trading to boost their investment portfolio.
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