An Overview of the Futures Market
According to the most recent estimates, the futures market makes up almost 10% of the trillion dollar forex market. There is no doubt among investors and financial experts that this number will increase rapidly, as more people see its potential for profits and making financial assessments.
Forex futures and traditional futures work on the same basic principles, but with one distinction: forex futures transactions are not conducted over a single establishment, but in several exchange centers all over the United States and the world. The most frequently used trading center for futures is the Chicago mercantile Exchange (CME).
In plain and simple terms, a futures contract or futures refers to a contractual or financial accord wherein you agree to buy or sell an asset at a set or fixed price at a future date. As a forex trader, you will earn your profit by evaluating the likely value of that asset at a future time.
Any kind of forex trading has potential risks, and the futures market is no exception. Several strategies are used by traders, and one of the safest, and most conservative, are spreads.
There are different types of spreads, including, Intermarket, Inter-Exchange and Calendar, but they all operate on the same principle: profit from the price disparity of two contracts of the same asset.
Two other popular methods of profiting from fluctuating prices are going long and going short. Going long means that a buyer seeks to cash in from a prospective price increase. For example, suppose you purchase an April crude oil contract worth $20,000 ($20 per barrel), certain that the oil price will go up. By the time the contract expires in August, oil prices shoot up to $45 per barrel. You have made a tidy profit.
Conversely, if you think the prices will decline, you can go short. You sell an April crude oil contract worth $20,000 ($20 per barrel), and the oil price goes down in September to $15. You can buy it back for a $ 5,000 profit.
Two other strategies are worth mentioning: hedging and speculating. Hedging is more conservative in nature. While there are different types, they all involve investments or contracts undertaken to offset any possible loss that will be incurred by another contract. Hedging is also ideal for determining possible potential earnings without worrying about currency fluctuations in the forex.
Speculating takes on the opposite approach, as it is about aggressively seeking out profits. Because speculating lends itself nicely to trendline analysis, technical tools are often employed, including arbitrage, Gann studies and various forms of chart analysis.
The complexity of the futures forex notwithstanding, it is one of the most important aspects of currency trading. By familiarizing yourself with its nuisances and techniques, you will become eventually more proficient and profitable as well.