Understanding Currency Futures Trading

Many people are getting the bug to day trade in the financial markets.  One activity that is growing rather rapidly is currency futures trading.  Why is this?  In recent years trading in the foreign currency market has expanded at a phenomal rate.  Globalization has caused some of this.  So many companies do business internationally and need to pay for goods and services with currencies other than their own.  With the need for this market increasing, speculators have come into the market in drooves.

The currency markets are estimated to trade over $4 trillion daily.  The market trades somewhere in the world 24 hours a day, 5 days a week.  The liquidity as well as the 24 hour market makes it very attract for speculators.  They can work whenever they want to and they are assured of getting orders done easily.  The currency futures markets are very similar.  There are some important differences one should be aware of.

The foreign currency market is loosely regulated.  There is no definite agency that regulates the trading in the market.  Trades are basically done between the buyer and seller.  This is known as market making.  The trader will take one position and the broker or market-maker will take the opposite side.  This type of trading is fine, however there is a better way for an individual trader to day trade in this market.

Getting involved in currency futures trading is another way for the individual speculator to day trade currencies.  Futures on currencies are contracts traded on the Chicago Merchantile Exchange(CME). One of the benefits to the individual trader is that the exchange is regulated much like the stock market is regulated.  This is better for the individual because he/she is not trading against a market-maker like in the actual currency market.  The conflict of interest factor is eliminated.

Currency futures trading takes place 24 hours a day, 5 days a week just like the FOREX.  The most popular currency pairs that trade on the CME are the EUR/USD, GBD/USD, CAD/USD and CHF/USD.  The pricing of the contracts is centralized, so all prices are the same no matter which broker you trade with.  The volume on the futures exchange is much smaller than the volume on FOREX.  If you are just using the market for day trading though, this should not cause problems.

Contract dollar amounts are preset.  For example the EUR/USD futures contract is for $125,000.00 worth of euros.  Since the contracts are based on the underlying currency pair prices, trading is very similar to trading the actual currency.  Economic factors will cause fluctuations in both currency prices making decision making with futures the same as if you were trading on the FOREX.

So how do you decide whether to trade on the FOREx or trade in currency futures?  If you have a huge amount of money you are trading, use the FOREX.  The higher liquidity will make it much easier for you to trade without affecting currency prices with your transactions.  If you are simply day trading for yourself, use the futures market.  You are not likely to trade such a large number of contracts that you will affect prices.  The futures market is more heavily regulated also.  For an individual trader this is best.

Whether you trade on the FOREX or become active in currency futures trading, you will need to have a solid understanding of the same factors that affect the underlying currency prices.  Becoming an expert at predicting price movements is the most important factor in becoming successful with either type of trading.

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