Strategies of Forex Futures
Forex futures trading is a method of investing based on the currency rate futures market. Essentially, traders are betting on the exchange rate at a future point in time. Major exchange rates include the euro to the dollar, the yen to the dollar and the euro to the yen. There are many markets around the world where these contracts are traded, with the Chicago Board of Trade the largest. There are many strategies to profit in these markets.
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Interest Rate Arbitrage
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Interest rate arbitrage is a common forex strategy which takes advantage of the interest rates in different countries. Japan's interest rates are historically low while Australia provides relatively high interest rates. A trader can sell the yen short with a 0 percent interest rate and use the proceeds to purchase the Australian dollar at 3.5 percent interest. The trader has a guaranteed profit of 3.5 percent, and with leverage this can be a 35 percent return.
Spot vs. Futures Price
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The spot price is the current cash price of a currency rate. These track very closely to the futures contract, especially for the contract that expires in the upcoming month. Traders can use software to take advantage of the brief divergences in price. For example, if the euro to U.S. dollar is trading at 1.300 and the February euro to U.S. dollar rises to 1.309, the software would buy the cash market and sell the futures market. The expectation in this trade would be that the two rates will converge, and the trader can profit from the difference.
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Economic Strength Trading
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Economic strength analysis is a fundamental method of predicting price movements. Traders base their predictions on the underlying growth of economies. Investors who were pessimistic about the Greek economy in 2009 may have sold short the futures market for the euro currency. These traders would have profited handsomely as the Greek debt crisis emerged in 2010, and the euro plunged from 1.4 to 1.2 to the U.S. dollar.
Moving Average Indicators
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Moving average indicators are one of the most common forex trading strategies. Moving average calculates the average of the previous closing periods and forms a continually updated line. For example, a 10-day moving average would take the last price of the previous 10 daily trading sessions and average them to create an updated point. Traders believe that the price will tend to move toward the average.
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References
- Photo Credit Currency image by Alhazm Salemi from Fotolia.com
