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How you can trade forex using currency futures

by , 04 September 2014

You have a few options open to you to trade forex.

You can trade forex on the spot market. But if you don't want to use your offshore allowance and apply for the necessary clearance certificate, this option isn't for you.

Another option you have is to trade currency futures.

So what is a currency future? And how do currency futures work?

Let's take a closer look…

What are currency futures?

When you trade forex using currency futures, you do so with a standardised contract. This contract is between two parties.

A currency futures contract exchanges a standard quantity of foreign exchange on a predetermined date at a price agreed today.

Currency futures trade on the South African Futures Exchange, or Yield-X.

Currency futures are particularly useful if you plan to trade the rand. This is because unlike other ways of trading forex, like spread trading and the spot market, the fees (spread to cross) are less.

Because forex trading takes place on an exchange, there are certain regulations and standardisations. These include:

  • Regulated trading hours;
  • Standardised products; and
  • Regulated trading practices.

Like trading single stock futures, there are margin payments, daily marking to market and cash settlements. These happen through a central clearing house.

Currency futures are part of a very well organised and regulated exchange.

How currency futures work

No one actually buys or sells anything when entering into a currency futures contract. You agree on certain aspects of a trade to happen at a specified future date, but only the difference in value changes hands.

In other words, one trader profits, another trader loses.

One currency futures contract has a nominal value of 1,000 units of the base currency. For instance, the USD/ZAR would equal $1,000.

There are currently eight different currency pairs available to trade. They all have quarterly expiry dates. This is the Monday before the third Wednesday in March, June, September and December.

You can trade the following currencies with the rand in South Africa using currency futures:

  • US dollar;
  • Euro;
  • Pound;
  • Australian dollar;
  • Canadian dollar;
  • Yen;
  • Swiss franc; and
  • Chinese yuan.

To trade currency futures, you need to open an account with a stockbroker who offers currency futures trading.

So there you have it, how you can trade forex using currency futures.

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How you can trade forex using currency futures
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