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Do You Really Need the Futures?

This week’s article is based on the nuances of the currency markets. Over the years of contributing to this content, I have endeavored to bring as much attention to the various features of this huge arena and how they can play a part in any consistent trader’s tool bag.  Over the weeks of trading, teaching and writing articles, I tend to get blocks of similar questions from my readers. I am sometimes asked about a topic from a number of traders which I feel can be addressed publicly in one of these articles, so as to benefit us all. This is such an occasion.

Looking back over my previous writings, I have mentioned the fact that Forex traders worldwide need to be aware that participating in the currency markets is not limited to Spot FX only. Yes this may be the most popular way to trade currency for the majority of market speculators, however there are other mediums through which we can get involved as well.  Aside from the Spot FX environment, the second most popular way to participate in trading currency is via the CME (Chicago Mercantile Exchange) FX Futures, and over the past few weeks I have had a number of people asking me if they too should consider moving their FX trading over to the futures market. Before answering this question I always like to ask them why they think they need to start trading FX Futures in the first place and most don’t even have an idea. It is usually because of what they have heard of been told, as is often the case in the newer and less experienced trader’s journey.

Firstly, if you would class yourself in this category, then please take my first piece of advice: Do not even think about getting into futures trading unless you are already making progress and gains in Spot FX. Jumping from spot to futures as a way to become successful at trading overall is never the answer. Please don’t think that changing your asset class is suddenly going to correct all of the problems you have in trading because it won’t. In fact, it will probably make things even worse! There are a number of very unique benefits to trading FX futures without a doubt. I know this firsthand, as I trade them myself but I also know why I trade them and this is highlighted in my trading plan. There should be logic and objective reason behind everything we do in trading, and choosing which asset class to trade is no exception to the rule. So let’s talk about why a trader would or would not want to bring a little futures trading into their trading routine:


As we already know, trading currency makes the use of leverage, allowing us to control a larger size of money with very little. A few years ago FX brokers were able to offer around 100:1 leverage on spot FX trades, however new regulations were passed in the United States which trimmed this down to 50:1 across major pairs and 20:1 for other cross-pairs (a pair which does not include the US Dollar). In other parts of the world, especially in Europe, 100:1 is still going and some brokers offer even greater leverage in the region of 400:1, which I personally feel borders on excess.

The FX Futures market, however, is a different scenario, in that all trades are taken as contracts not lots and are traded through the CME. Because they are traded through an actual exchange, this means that the exchange itself dictates the margin requirements. For a futures trader to buy or sell one EURUSD contract, they would be required to put down a margin of around $4700. Considering that you are controlling 125,000 Euros per contract, this means that the leverage works out to around 33:1 with current exchange rates. This may not be as good as what we can get for our money in spot FX leverage but it does keep traders responsible and does not allow them to overload their positions. If you are currently trading with a smaller sized account, you may be better off trading spot FX so as to get a greater use of your money. However, remember that leverage is also a double-edged sword and while you can make more money you can also lose more if you are not a conscious risk manager. What is more important to you: protecting your money or growing it?

Transparency and Execution

Trading Forex Spot means that you are trading through a broker, who is basically providing you with a bid and ask so that you can get involved in the market. This market which they create is their representation of the Central Interbank Market and prices are pretty much following along. Obviously there are very slight discrepancies in the brokers’ quotes across the board, mainly due to the fact that they are all giving price quotations which are derived from a central market itself. As a swing and position trader there is no huge disadvantage in this, considering that stops and targets are likely to be bigger in this type of trade. However for a day trader looking to use very tight stops, the spread between the bid and ask can make it challenging to keep costs of trading down, and this spread will constantly need to be factored in to the final profit targets of each trade.

Another thing to remember is that when you are trading FX spot, the broker is able to potentially see your orders on the system, as it is their market. When you trade Futures on the other hand, you go to a central market place which holds host to everyone’s orders. If one trader wins, then another loses. Actual volume is tracked in the market each day, thus showing us a greater degree of transparency across the board. Futures traders typically enjoy faster and more detailed execution systems too, making use of Depth of Market to see orders being placed in real time like below:

 The above shot is of a live ladder on the EURUSD futures trading through the CME, with real orders to buy and sell being posted and shown for all to see. We can also see volume traded which can give a better idea of what the trading day is panning out like. For a seasoned day trader the futures give us the extra level of transparency and ultra-low spreads. This does however come at a price, with costs of data-feeds (free in Spot FX) and larger accounts needed to trade. For a swing trader this is not really something to worry about as you will be looking for bigger moves anyhow. Again, the choice here comes down to really what your style of trading is and respecting your plan.


So let’s get to the strategy elements. Market turns will happen at price levels where Supply and Demand is most out of balance. This is the most important dynamic of understanding price movement and is the core feature of our rule-based strategy that we teach here at Online Trading Academy. Once a trader understands how to recognize what this picture looks like on a price chart, they can then form their trade plan and rules and objectively analyze the FX markets for low risk, high potential reward trades. The core strategy can be applied to FX spot markets and of course to the FX Futures market as well, but something we do need to take into account before blindly jumping into either market is that volume plays a key role in the safety of executing a trade.

Let’s take a look at an average day’s trading volume for the CME traded EURUSD futures contract:

 At 170,000 odd contracts by the end of the trading day, we can easily confirm that there is more than enough volume to trade the EURUSD futures contract with safety and ease, if a rule-based trading strategy is followed with discipline. However, what options do we have on the side of the more exotic pairs like the GBPJPY? Yes this is an available futures contract to trade but let’s look to the volume traded on the CME at the same date and time:

As we can see, we would be the only people trading the contract! Not the ideal situation by any means and certainly not safe to trade. This is especially frustrating when we look to the chart of the GBPJPY spot and see plenty of supply and demand trading opportunities:

It should be understood that the choice of whether to trade currency futures or not needs proper thought and planning ahead of time. Personally, I use them as a powerful tool in my trading activity but I use them for a reason, not simply because they are there. Your choice is without a doubt limited when you trade FX futures, but if you are trading actively intraday, then this could be a good thing. Remember that if you are considering FX futures in your own trading plan, then please make sure you fully understand every aspect of how they work and expiry dates too. It can get ugly if you don’t! I hope this article clears a few things up for you.

Take care and be well,

Sam Evans


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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