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Currency Futures Trading

Many of you reading this will probably be happily  be trading in the spot currency market, and with no intention to change, which is fine. As you probably know I use two retail brokers myself for different strategies, as well as using currency options and currency futures to hedge trades. I am not advocating that you make a change, but simply that there are alternatives available, and to be aware of the changing market. As I said earlier, the markets over the next few years will change dramatically and I believe the exchanges will lead the way, offering better execution, complete transparency, and market liquidity, all in a regulated environment. You might also be interested to know that currently around 7% of the total foreign exchange market is traded in futures.

So, as a retail trader, are currency futures a sensible alternative – for the novice trader the answer is probably no, at the moment. As we will see shortly, both markets have advantages and disadvantages, but for the new currency trader the spot market wins hands down at the moment in one area, and that is on lot size, with some brokers even offering 1:1 for new traders. Most traders use mini lots of 10,000 units which equate to $1 per pip ( approx.), whilst larger more experienced traders move to regular lot sizes of 100,000 units. These are very similar in size to currency futures contracts, so if you are trading in these lot size, futures may well be appropriate for you. Mini lots are now starting to be introduced by various exchanges but even these are only 50,000/60,000 units in contract size, so still some way from the mini lots of the spot fx markets.

So in summary, if you are and experienced trader, trading in regular lot sizes in the spot markets, then currency futures may be for you – if you are a novice trader, I would suggest they are probably not for you at this stage, but I can assure you the exchanges will cater for you in due course – the market is just too big to ignore – so keep an eye on developments!  So let’s take a look at how the spot, and futures markets compare, and I will assume that you have an understanding of how the futures market works in principle as currency futures trading is no different.

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