Trading Forex Futures Guide

by: Mohammad Hafiz
forex futures

More than $5 trillion is traded on the Forex market daily. However, Forex is not the only market where traders participate in the foreign exchange process. Forex futures are very close to Forex itself and the turnover of this market is close to $100 billion.

Forex futures are futures contracts with an exchange rate as the underlying commodity. So, you can sell or buy a certain amount of currency at a set future date and price. Forex futures were introduced in 1972, at the Chicago Mercantile exchange (they are called the CME group now). It happened after the gold standard and fixed exchange rate were discarded. They are traded like any other futures in terms of the contract months.

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Types of Forex futures

Trading Forex futures offers specialists a great variety of assets from EUR/USD to E-micro Forex futures that are 1/10th of the standard contract. You can even trade Forex futures for exotic currency pairs such as PLN/USD, RUB/USD, etc. Various contracts vary by liquidity. EUR/USD will be traded more actively than BRL/USD.

While Forex futures are traded via brokers, currency ones are traded on special exchanges which regulate the process regarding a certain pricing and clearing. The market price is always nearly the same regardless of a broker.

G-10, E-mini and E-micro accounts are the most frequently traded and may show the highest liquidity. They are EUR/USD, GBP/USD, JPY/USD, CAD/USD, AUD/USD, CHF/USD, NZD/USD, EUR/GBP, EUR/CHF, EUR/JPY.

The correlation between the Forex trading instruments and the futures market tends to +/- 1. Let's look at some examples on the chart.

Forex futures

There are the EUR/USD graphs and the futures on the euro (6E) graphs at the top. We can see that the dynamics of these tools are identical because the correlation between them tends to +1.

There are graphs for the USD/JPY pair and the JPY/USD (6J) currency futures as well. These assets have the multidirectional dynamics since the correlation between them tends to -1.

Contract specifications

While trading Forex futures, you have to list all specifications such as contract size, min price increment, tick value. It helps traders to determine their position sizing and potential profit/loss ratio.

Note that every contract has a minimum tick value and price increment.

A specification of the EUR/USD futures contract

futures contract specifications

More detailed information on the Forex futures specification can be found on the CME Group official site.

How Forex futures are settled

There are 2 methods of doing that. Usually, market participants offset their positions before the last trading day by opening an opposite deal. When this opposite deal closes the trade before the last day, earned or lost funds are debited/credited from the account.

Sometimes trading Forex futures can last until a maturity date when a contract is delivered physically or it is cash-settled. That depends on a certain contract or exchange. Mostly, Forex futures delivered 4 times per year (in March, June, September, December):

  • Н – March
  • М – June
  • U – September
  • Z – December

Here are some examples:

  • 6E/Z7 – a futures contract on EUR/USD that expires in December 2017.
  • 6J/U7 – a futures contract on JPY/USD that expires in September 2017.
  • 6B/H8 – a futures contract on GBP/USD that expires in March 2018.
  • 6C/M8 – a futures contract on CAD/USD that expires in June 2018.

Usually, the expiration date is around the 20-s days of a month.

Moreover, Forex futures contracts don’t exist between buyers and sellers directly. Each side has an arrangement with a clearinghouse. It reduces the risk of the both sides as every participant won’t fail to follow the contract terms.

Oversight

Forex futures brokers follow the rules of the CFTC (Commodity Futures Trading Commission), the NFA (National Futures Association) and the exchanges. For instance, the CME Group, one of the biggest world exchanges, has a special Market Regulation department for performing supervision. In fact, Forex futures are regulated better than the spot Forex market.

The difference between Forex and futures

  • Trading Forex futures is a part of the Forex trading in general. Since the spot market is the biggest in the world, futures are a fraction of the whole volume.
  • Forex futures are regulated more precisely than the spot Forex market.
  • Trading Forex futures doesn’t pretend large leverage unlike Forex currency trading when we can use up to 1:3000 leverage.
  • Taxes, commissions and fees differ depending on a situation. Futures usually have fixed commissions while traders on Forex have to pay spreads.

Finally, I can say that everyone who wants to work with currencies has options whether to trade currencies themselves or futures. These instruments are alike but have slight differences I mentioned before.

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