Dealing with futures is generally carried out either through speculation or hedging. Both of these practices provide their own advantages when trading with futures, so traders should review the futures basics and then look into which of the two approaches might work best for them. The speculation sheet provided by the broker should provide the details of the contract on which the foreign currency will be purchased: time increments, amounts and pricing limits, trading hours of the market and the sizes of the contracts.

A brief recap on the basics of futures: Futures are a contract to buy or sell a specific amount of a specific currency at a specific price on a specific date in the future. Just like any other contract, unless there are extenuating circumstances, the terms of the contract will be executed on that date. As a trader’s tool, thy not only allow those who have solid speculations about the future exchange rates to capitalize on that volatility but locking in a price also allows international business to make purchases and sales without having to worry about market fluctuations.

Just as the world of futures can be a way to eliminate risk, it can also be an arena to capitalize on great currency fluctuations. CBS Money Watch has a great article about capitalizing on fluctuations. These Forex derivatives should be understood deeply before delving into the world of either speculation or hedging. The first, speculation futures traders want to get closer to the risks in order to make larger profits while the hedging traders are more interesting in eliminating risks by setting very specific limits on how far into the future price changes they are willing to go.

1. Speculation is for the more risk-prone types that are more interested in making a profit than anything else. Trading futures allows for a number of advantages for futures participation including generally higher leverage per contract, lower spreads and transaction costs are that low or not at all. Speculators are often more technical traders that rely on the trending charts to lead them to exploit the volatility in futures trading.

2. Hedging is the opposite approach. A great example of how hedging can be used as an excellent tool is by looking at the business world. If a Japanese company wants to export to an American purchaser for a specific price on the goods, it will have to deal with the currency exchange. However, by purchasing futures contracts on the amount of the sales, they can eliminate the fluctuations and have a much better idea of the guaranteed revenue they are going to earn. Some excellent articles can be found on Forex Hedge.

  • The Disadvantages of Futures: Some disadvantages of the futures world are enough to put off some investors.
  • For starters those with less investing capital as the contracts are seldom sold for lower than $50,000-$100,00 USD.
  • Secondly, unlike the general behavior of the Forex marketplace, there are certain times that the exchange is open and operating. Finally, there are some fees attached to the contracts, but given that these contracts are minimally for a good amount of money, that fee should be fairly negligible.

Regardless of how one decides to participate in futures, its advantages over other options in Forex trading are obvious, for starters with the fact that the contracts can be bought and sold up to the date of effectuation. This separates these contracts from forwards because the holder of the contract has the capability to constantly re-evaluate the purchase and decide along the way if it is a profitable venture.