Futures Trading Explained

What is futures trading?

Futures trading in the Forex market is buying or selling a currency pair on a date in the future for a price that has been agreed before the trade. The date for closing the deal is called the delivery date. On this date, final settlement is made and the deal is completed.

The delivery date is sometimes called the value date.

Futures trading is different from option trading.

- In option trading, you can decide if you want to buy or sell when the time arrives. You are able to decide against completing the deal if that is what you choose.
- In futures trading, you have already agreed to make the deal in the future. You cannot withdraw.

What is the futures trading market?

The futures market is a very complex business. The market is not limited to financial instruments like currency. Many other goods can be traded on futures contracts. Trading in goods is called ‘commodity trading’.

Some traders who take part in the futures market use the market to take an opposite position on goods they are holding. By taking an opposite position, they can limit the risk of financial loss when and if the price changes. Taking an opposite position to limit risk is called ‘hedging’.

Other traders do not own the goods they trade as futures. A person buying a futures contract hopes to profit from rising prices. A person selling a futures contract hopes to profit from falling prices. Buying and selling futures contracts when you do not own the goods is called ‘speculating’.

Futures trading as an investment

Using futures trading as an investment can be risky. It is important to understand the market before you invest. You should know how much you could possibly lose and decide whether you want to take the risk.

The futures market is not right for all investors. Think about your investment goals and judge whether the futures market is right for you.

If you decide that you have the resources to invest and the right reasons for investing, you should think about whether to take advice from a broker, or whether to make your own decisions about investing.

You should then compare the different methods of trading and choose the one that is best for you. When you have decided, you should set some limits for your trading. You should not risk more than you are prepared to lose.