Forex Preceptor

Did you know that there are actually two different types of forex trading systems?  The one most of us are familiar with is called spot forex trading, but there is also forex futures trading.  Spot forex trading does not have a specific location where the trades occur, but is rather done over the open market.  Future forex trading takes place on an established exchange like the Chicago Mercantile Exchange.  The exchange that the currency is traded on will determine the trading hours, delivery dates, contract size, the deposit that must be paid by the buyers and sellers and final settlement rules.

Unlike spot forex trading, where you buy and own the currency you have traded for, forex futures are agreements to buy and sell currency in the future.  In essence forex futures are based on a contract. These forex futures contracts are an agreement between two parties to buy or sell a specific amount of one currency against another currency at a pre-determined future date.  The trader makes money if the exchange rate between the currency pair is higher on that date and loses money if it is lower.

There are other differences between spot forex trading and forex futures trading.  With spot forex trading you can make trades 24 hours a day, with futures you must trade at during trading hours that the exchange is open.  When you trade forex futures you pay a commission, whereas with spot trading you just pay the spread, which is the difference between the buying and selling price.

Despite the fact that there are some disadvantages to forex futures trading when compared to spot trading, there are some situations where it might make sense.  For companies who have exposure to forward foreign exchanges, such as exporters who get paid in foreign currencies, these businesses might want to lock in currency rates to help prevent potential future adverse currency fluctuations.  Futures trading also have standard contract terms and a central exchange clearing house which can both help to simplify transactions.

Leverage on a forex futures trade can also be greater.  You do pay an initial margin or deposit to help cover any potential adverse movements, however if the currency price beings to move in your favor you can potentially profit more than you would investing in a spot forex trade. In short, combing futures and forex equals the potential for immense returns. However, the leverage principle can also work in the opposite direction and you can also end up losing more in a futures trade.

Forex futures trading gives you another type of investment opportunity, but you do need to weigh all the pros and cons before proceeding with this form of investment.

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