There are many ways to use futures in your currency trading, but as I have said many times before, this is not the place to start if you are a novice – trading currency futures requires experience, knowledge and a complete understanding of both the market and the risks. When I started in index futures, one contract traded at $20 per point, so a 10 point move, which happened in minutes or seconds was a very quick way to lose all your money. I started with very tight 5 point spreads, which were invariably taken out by by minor whipsaws in the market. So please remember, these are highly leveraged instruments which can make you a lot of money quickly, but which can also wipe you out just as fast.

So let’s start by looking at a low risk trade. The currency futures spread trade is a relatively low risk trade in the futures market which is very popular with professional traders, but little used by the smaller retail trader. Now this strategy can be applied to many futures contracts, including commodities and currency, and I have given an example on the futures trading introduction site using contracts on different commodities but which are in related markets. In this case we are simply going to use the same currency pair, but buy and sell in different contract periods. This is often called a calendar spread, but it may also be called an inter delivery spread, intra market spread, or horizontal spread. The mechanics of the trade are very simple, in that we buy and sell contracts in the same currency pair, but in different contract periods.  Spread trading is one of the most conservative forms of futures trading and below I have listed some of the main benefits :

  • Intra market spreads require much lower performance bonds than those needed for naked positions as the trade is in effect a partial hedge
  • Because you are only required to provide a lower performance bond, your returns will be better
  • Spreads generally trend better than outright contracts
  • A spread trade reduces some of the risk of futures trading

Now, regardless of the type of spread, the logic behind all of them is that the long side of the spread will increase in value relative to the short side of the spread (or, it will decrease in value less than the short side). For example, if both the long and short sides increase in value, the spread position will profit (before commissions and fees, of course) if the long position increases more than the short position. If, the opposite occurs and both positions decrease in value, the futures spread trader can still make a profit if the long position decreases in value less than the short position. In other words, this is a directionless trade and the  overall market direction does not matter in a spread position, only the rate at which the contracts move — that is, the relative pricing — between the two contracts counts.

So for example we might buy the EuroFx contract for March and sell the EuroFX contract for September. The choice of contract periods will be a choice for you as a trader and your long term view on the market – there is no right or wrong combination of contract periods, but generally the most popular would be to enter the trade with at least one month to expiry of the shorter term contract, in order to give yourself sufficient time for the differential to develop.  Also please remember that you can lose money on a spread trade. Because spreads involve both a long and a short position in related markets or contracts, they are, in effect, partially hedged positions. As a result, a well-chosen spread can have lower volatility and risk than an outright futures position. Now of course there is always a flip side to trading, and with lower risk comes lower rewards. In addition trading spreads is going to cost twice as much in commissions. Spreads involve two different futures contracts, and both sides are assessed commissions and exchange fees. Commissions in the futures market are generally charged on a per contract basis, and therefore trading a spread involves twice the cost of trading outright futures positions.

OK – that’s about it on currency futures – if you are planning to start as a novice in futures, then I would suggest two things. Firstly, start with the smallest contract available, and secondly start with a spread trade. This will reduce your exposure and risk to the lowest possible level. Naturally there are many ways to trade both as a hedge and as pure speculation – for myself I tend to be more of a speculator, but there are an infinite number of ways to use futures contracts either on their own or in combination with your spot trading – ultimately the choice is yours.

Thank you for getting this far, and I hope you found the site useful and informative, and will help you get started in trading currency futures. If you have any questions please just drop me a line – I love to hear from all of you and will always do my best to help if I can – kind regards Anna