You’ve heard of Forex trading before but you have tons of questions, like: what is it? How do you make money using it? How do you start using it to turn a profit? There are tons of questions about Forex trading, and we’ll provide some of the answers here.

Forex stands for foreign exchange market. Basically it is trading currency. Everywhere in the world, money is worth a different amount. The dollar in one country may be worth more, or less, in the country next to it.

If you are able to buy when the dollar is worth less, and sell when it is worth more, you have then turned a profit. It is much like trading on any major stock exchange except that it is open 24 hours a day and has the potential to make even more of a profit for investors.

Getting involved in Forex trading, however, may take some time. The first thing that you need to do is study. Study, study, study. If you go into Forex trading with absolutely no training, you may wind up losing all of the money that you have invested, especially if you have invested a lot.

You can learn quite a bit about Forex trading online, but the experts all agree that it is best if you take a few classes. There are some online classes available that you can take that will help you to understand exactly how Forex trading works.

It is very important to learn as much as you can about the basics. Yes, there are tons of extra things that you can learn, but like anything, learning about the basics is paramount. One thing to remember is that, at its core, Forex trading is about buying, and selling, money. When you buy one currency, you are selling another at the same time.

Once you have studied and feel that you have learned as much as you can, it is time to begin trading. You start by finding a good broker and setting up an account. When you set up the account, ensure that you set up a small one so that you can learn things slowly and surely.

You will need trading software. Use it. Learn as much as you can about it by playing around with it. Read the guides and become an expert at running whatever software you are given. Remember: software is your friend.

If you can, start with a fake account. Some brokers allow you to use demo accounts which can help you to learn the program as well as the entire process. You may want to do this for a few months until you’ve gotten the hang of it.

After you’ve completed that step, sit down and think about how much you can afford to lose through Forex trading. Most people lose money during the start of their journey so it is important that you set goals and be realistic.

There are some things to worry about when it comes to Forex trading, but through taking your time and learning everything you can, you can set yourself up in the position to become a great Forex trader.

Forex trading requires understanding the forex stocks comparison. To trade forex effectively you must understand forex trading strategy to stay abreast of it all.

For someone who has a stock portfolio and wants to hedge the risk, it would be time to use the S&P 500 Index.  It would result in a portfolio which has locked-in gains at an interest rate which is positively risk-free.

This feature protects stocks against price fluctuations which happen in the broader market.  It would also give traders some leverage in handling their stocks.

Full-size futures and E-mini index futures

Full-size futures are regular futures contracts which require very high margins.  They could overwhelm an average trader, especially one who’s a beginner.  E-mini index futures cover the same contracts but as smaller versions.  The smaller contract gets traded for a fraction only of the margin price for the larger contract.

To put it in perspective, you could trade within a margin of $3,000 to $5,000 on a smaller contract instead of on one as large as a regular S&P futures contract worth $20,000 or more.

This lower margin of risk is enticing enough for most traders to engage in index futures, especially when the market they choose to trade in is very volatile.  This is one situation when a trader deems it best to hedge surely than to risk speculating.

Hedgers and speculators are said to be such great observers of the futures markets.  The best of them are experts on how fellow traders behave and on how the market operates.  To participate in the futures market with more confidence and vigor, let’s put you in a position of strength.  Let’s find out how to hedge and speculate best!

How an interest rate futures contract works

Here’s how this type of futures contract works.  When the interest rate moves lower, the contract seller would pay the buyer for that lower interest rate at that given time.  When the interest rate goes higher, the contract buyer would pay the seller an amount which is more rewarding.  Instead of receiving whatever rate was specified in the futures contract, the seller would receive a better benefit.

A price index for interest rate futures

You need to be accurate in measuring the gain or loss in an interest rate futures contract.  That’s why a futures price index of this sort was devised in the first place.

If you are buying, subtract the futures interest from a baseline of 100 to compute the figure for your index.  When interest rates fluctuate, so do price indices.  You would observe that indices go higher as interest rates go lower, and vice-versa.

How to compute gains versus losses

The most common base price move would be a tick value of .01 which equates to 1 base point.  Other contracts may also have a tick of half a base point depending on the agreement.

Put simply, a tick upward would mean a gain in your contract.  A move downward would equate to a loss.

There is a way for traders to hedge their position in an interest rate futures contract.  You will have your fill of hedges, speculations, and pricings in Chapter 4.

In the U.S. market, interest rate futures are usually traded on the Chicago Mercantile Exchange or CME.  Some of the most common short-term interest rate futures you would encounter are as follows:

• Eurodollars. Three Month Eurodollars are actually U.S. dollars presently deposited in foreign commercial banks.  Banks are able to fund U.S. dollar loans when foreign purchasers need them without the effect of currency exchange rates.  It is currently the most highly-traded futures contract of all.

• Euroyens. Consider them very similar to Eurodollars.  They represent Japanese yen deposited outside Japan.

• One Month Libor. This also reminds you of a Eurodollar contract.  However, you’re talking about huge sums of money like a 3 million dollar deposit.

• One Month Fed Funds. Non interest-bearing, these deposits are lent out as funds to other Federal Reserve member banks but only on an overnight basis.

13 Week Treasury Bills. You get more security from risk-free investments such as quarterly T-Bills which are backed by the U.S. government.

Futures trading and forex trading

Just imagine.  Approximately 350 billion dollars are traded daily.  Large banks, multinational companies and investments known as hedge funds populate the majority of currency futures trading that happens on the floor.

To hedge is to make an investment which is more secure.  With the help of a futures contract, you can choose to sell your stock already at a set price.  Hedging reduces the risk of loss especially when the market fluctuates and price movements are likely to go adverse.  The next chapter will tell you all about the benefits on hedging on pricing.

A basic idea on how forex trading works would be to your advantage.  Similar to forex trading but uniquely apart, currency futures trading is a little more complicated as a foreign exchange market.  With forex futures trading, the currencies of different countries are traded against the dollar.

Some of the most liquid foreign currencies are those of the G7.  In particular, the British pound, the Japanese yen, and the Swiss franc are very liquid and trendy.

How currency futures began

An industry which began in the 70’s, currency futures trading ended the gold standard.  For every U. S. dollar printed, there should be enough gold reserves in the treasury.

Without this standard, the dollar and its actual value now fluctuate.  The numbers can’t help but change daily.    Liquid and trendy as this futures trade can be, any trader can speculate as to what the dollar’s value would be as against any currency on any given day.

The future of the dollar

Are we to assume, therefore, that the value of the U.S. dollar will keep waning?  When confidence in the dollar fades, the popularity of gold correspondingly rises.

People are beginning to realize that solid gold and silver are safer, more valuable investments than paper bills.

An increase in gold reserves

The latest news reveals that most banks now hesitate in selling their gold holdings.  Along with this reluctance, many countries like China are now eyeing an increase in their gold reserves.

This gold rush could make gold prices plummet and dollar prices plunge.

Because of this serious possibility, it becomes even more important to be good at predicting currency futures.  If you exercise good judgment in your futures trading, you could still make trades that buy low and sell high on currencies.

Let’s cite a clear example.  Crude oil in its raw form is a commodity which is processed into gasoline as a finished product.

This brings us now to futures on energy commodities.  If you want two of the most popular energy futures, would the thought of crude oil and natural gas steam you up?  Would you warm up to the idea of a third alternative which is heating oil?

Search online and you would find a wealth of energy product listings which enumerate an assortment of energy commodities you can trade with.  Aside from crude oil and gas, have you considered ethanol, electricity-related commodities, or other green environmental products?

The pros and cons of energy futures

Energy futures satisfy our requirement of being very liquid and trendy.  There is so much activity in the fuel market, and everyone’s so interested in its current prices.  The prospects are good and the future’s looking up for sellers because fuel buyers and oil manufacturing companies are here to stay.

The downside to it is that most energy futures are large-sized.  Such huge investments are not ideal for low-budget traders, especially beginners.  Your winning edge, though, would be your perceptive grasp of world politics, global economy, and other international issues.

Such issues directly affect how the prices of energy commodities fluctuate.  Thus, energy futures are a volatile yet exciting venture to make if you know how.

How energy futures contracts are trending

Volatile as energy futures are, they continue to trend up and climb higher.  Seldom peaceful, the oil-rich Middle East and its neighboring territories dominate the playing field.  Crude oil futures are able to trade at $90 per barrel and beyond the hundred mark.  Prices can trade up $4 one day then plunge $3 the next.

As for natural gas, the commodity and its price are not as volatile.  The trends are more long-term depending on how mild or harsh the weather is.

The meaning behind a commodity

At this point how would we define a commodity?

The word trade is as old as time such that anything which can be exchanged is practically called a commodity.  But in the financial world, the word commodity takes on new meaning.  It refers to raw materials more than finished products.

Defining commodity futures

In futures trading, the term commodity futures can be defined as contracts where one party buys or sells a commodity from or to another party at a set price.  There is a specified quantity agreed upon, and both parties are obliged to settle the contract by cash on a fixed delivery date.

Learning more about commodity futures contracts

Futures Trading 101 would tell you to learn more about a commodity futures contract.  You have to know more about how commodity futures operate and how the market behaves, whether you are a buyer or a seller.

Farmers who are the commodity producers and food processing companies who are the commodity buyers all use futures contracts.  It assists them in securing the current market price for their goods.

For any farmer, such a move protects him when prices fall unexpectedly before harvest time.  Because agricultural prices trend and tend to fluctuate, a commodity futures trader would speculate on a good price hoping to make a great profit.  The word “speculate” again crops up.  Because it matters that you do your speculations well, we’ve devoted the next chapter to a discussion on it.

Commodity futures – their number and impact

As part of the futures industry, commodity futures significantly affect so many lives.  With people numbering by the millions and billions, it exerts such a great impact on the world.  Closest to home, it affects the food we eat, the clothes we wear, and the materials we gather for our shelter.  Wheat, cotton, and lumber would represent these needs, respectively.

It used to be that futures trading focused so much on agricultural products, but the market has been revolutionalized into one that includes machinery, transportation, and currency, among others.  They, too, affect how food gets distributed and how economies become more productive with exchanges and trades.

In such a growing industry, there are a number of additions to commodities aside from your typical agricultural grains and livestock.  To date, cheese and skimmed milk products have just been recently added.  The consumable edible oil, crude palm oil, has also slipped through lately.

Predicting commodity futures

When you talk about commodity futures, you are trying to predict the future direction of your commodity price as to whether it will go up or down.  A commodity price can either go higher, lower, or remain the same as you look to the future.

This is where the challenge lies.

As a beginner trader, you have to make sure that the market you choose is one that is liquid AND trendy.  Liquidity means it has high trading volume and much activity going on.  It should also be an active market which trends up or down.  Only then would you be able to hone your skills as a futures trader.

Futures trading requires practice so you should optimize on websites which offer free practice accounts on commodity futures.  How can you resist such freebies when the market data are real but the money is not?

Once you’re ready for the real thing, you can fund an account and arrange the paperwork with a broker.  From there on, you can select a market to trade with and a contract month to begin.

Choosing commodities to trade with

Food futures are a safe choice to being with.  However in the futures market, they are less liquid and they have less trading volume.  Metal commodities especially those of gold, silver, and copper are even better choices.  They are literally a goldmine for beginner traders to explore.

If you’re interested in trading with futures which are very liquid AND trendy, you can never go wrong with agricultural commodities like wheat, corn, and cotton.  In a green and health-conscious society, oats, rice, and soybeans are also gaining good ground.

What exactly makes these agricultural commodities so liquid and trendy?  Well, it’s the fact they they’re very much affected by variables like seasonal changes, climate conditions, and local production matters as to critically decide your profit in a major way.

Commodity futures despite the risk

Put futures and trading together, and they involve to a reasonable amount of risk.  You will have to put up a margin, meaning a partial amount of your contract value.

Usually you would buy 10 percent, and then the rest could be borrowed from your broker.  When the commodity price increases, you gain; when the price decreases, you lose.  When you keep losing, your broker would issue a margin call which prompts you to add more money to your account lest the broker close out your transaction.

You can prevent this from happening by monitoring your position.  Keep close tabs on the market to cut your losses.  Close the transaction yourself when you’ve made a profit.

Any futures investor tries to make good predictions. He makes trading decisions based on what he thinks would happen to the price in the future.

A wise trader is quick to notice when prices fluctuate.  He always puts himself at an advantage by buying or selling just in time.  He manages to cut his losses and make some profit.

When individual and corporations transact these exchanges online, neither of them get to view the goods.  Neither of them also get to own anything tangible, unlike with stocks wherein you actually get to own shares.  Futures are more a matter of speculating on how well these goods will do in the market.

To speculate means to choose an investment even when it poses a higher risk.  Contrary to traditional trading, you are opting to risk more than the average.  It is an offshoot of having foreseen or predicted a favorable price movement.  Speculation is often accompanied by so much anticipation.  If you can wait until Chapter 4, we’ll brief you with more!

Futures trading does not necessarily have to happen on the trading floor because both the buyer and seller may not have that interest in producing or buying said goods.  For instance, agricultural goods get bought and sold over and over again in the course of trading yet they never really reach the trading floor.

Besides agricultural products, there are other types of goods involved in futures trading.  These goods are called your futures trade commodities, and they can be classified into five different types:

1. Agricultural futures. By far this is one of the largest and most basic of all futures markets.  Topping the staple goods in farming would be wheat and corn.
2. Energy futures. The global economy banks precariously on energy futures.  Think about crude oil and natural gas, and you will have the most bankable of fuel trades.
3. Currency futures. With worldwide commerce happening 24/7, most experts would agree that forex futures trading undoubtedly ranks high as the largest futures trading market.
4. Interest rate futures. Here is a steadily growing market which is becoming more aware of how money can be made from bonds and interest rates themselves.
5. Food futures. Who would argue with the fact that food is the most basic commodity necessary for human consumption?  That’s the very reason why foods as basic as coffee, milk, and sugar would also top the list of some of the fastest-moving basic commodities around.

With a choice ranging from agricultural commodities to financial commodities, no wonder the futures market is such a thriving business especially for seasoned traders.  The mere thought of all of these commodities with their potential value can be very engaging to any trader, beginner or otherwise.

However, if you are a novice who has not had much experience in futures trading, it would be advisable for you to concentrate initially on just one or two commodities.  Capitalize on those goods which are your strengths and which suit your trading style.

In order to assure yourself that you will take good risks and enjoy your career as a trader, let’s get to know the different types of futures ONE BY ONE.

These terms are slightly dependent on the exchanges market where you plan to base your contract on, as well as the commodity under contract.  For example, a wheat futures contract has a standard unit size of 5,000 bushels, and the contract months are March, May, July, September, and December.  As such, you can only set up contracts with increments of 5,000 bushels on the months mentioned above.

One of the sets of terms that varies is the grade, or quality rating of the commodities involved.  Not all countries follow the same standards for quality in their commodities.  As such, standardized tests or highly-precise specifications are necessary to ensure the quality of the commodity being traded.

Because the common terms of contracts differ per commodity under exchange, we cannot discuss them here.  There is just too much information to cover, and it tends to be quite technical.  Once you have a solid grasp of the basics, then you can read up on the minutiae of futures trading contracts.

Commodity markets are regulated by different bodies across the world.  Generally, a commodity market is governed by some government or semi-government committee overseeing the various aspects of trading in that country.  A short list of such authoritative bodies follows:

• Australian Securities and Investments Commission.  In Australia.
• China Securities Regulatory Commission.  In China.
• Securities and Futures Commission. In Hong Kong.
• Securities and Exchange Board of India and Forward Markets Commission.  In India.
• Financial Services Agency.  In Japan.
• Monetary Authority of Singapore. In Singapore.
• Financial Services Authority.  In the United Kingdom.
• Commodity Futures Trading Commission. In the United States Of America.

In futures trading, margins are important because of the risks involved in prediction.  Who knows if things will really turn out according to plan?  As such, parties need to deposit collateral, just in case they cannot make it all the way to the end.  In futures trading, there are a few major types of margins:

• Clearing Margin.  This is meant to safeguard the interests of customers by giving the providers (or sellers) incentive to uphold their obligations to performing well.
• Customer Margin.  This is required from both buyers and sellers, and the value for this is calculated based on market risks and the value of the contract.  Sometimes referred to as a performance bond margin.
• Initial margin.  This is what is needed to start a futures position.  The value can change as the market prices move, and at times of high volatility, calls can be made within the trading day.  If the item exchanged in the futures contract is traded on commodity exchanges, then the concerned authorities are the ones to set the rate for this margin.
• Maintenance Margin.  This is a set minimum amount that a customer must maintain in his margin account.

Futures typically have “true-ups” or periodic partial settlements within the contract period, which allow both parties to keep close track of developments.  The amount for these margins is usually set at around 5 to 15 percent of the value of the contract.

The first reference to a futures contract was made by Aristotle, that great philosopher.  He related the story of Thales, who we could only describe as an ambitious businessman.  This first story is an example of the second purpose for futures contracts.

Thales had pretty good foresight and could make good predictions regarding the olive harvests.  Feeling that the upcoming olive harvest would be huge, he decided to negotiate with the owners of olive presses in the locale.

Olive presses are used to press olives for their oil, which is a staple in many Aegean and Mediterranean cultures.  Still, when there are no olives, these presses basically stay still and aren’t worth a whole lot.

Thales knew this and thus offered to deposit money with the press owners.  Because the olive season was still in the future, Thales was able to negotiate a lower price.  The owners took him up, because they were not very sure about just how large the olive harvest would be.  Thales got a contract for exclusive use of the presses when the olive harvest rolled around.

When the olives came to fruition – literally – Thales then rented out the presses at rates that he controlled.  The crop was a good one, and all the presses were wanted for use, all at the same time.  This meant a payoff for Thales, and all in all he made a tidy profit, in addition showing just how foresight and risk-taking can improve profit.

The following is a paraphrasing of Historical events in Japan that are also related to futures trading.  In fact, it is an example of an exchanges market, as well as a forerunner of modern banking systems in Japan.

In the Edo Period of Japan’s history, rice was the main medium of exchange.  Rice was the very foundation of the Japanese economy, and it was even used to pay the samurai for their services in guarding nobility.

In the 1730s, the price of rice plummeted as a result of poor-quality harvests and trade issues (most likely abusive merchants taking advantage of poor farmers).  The samurai went into panics, since this meant that they made that much less money, after their rice was converted into coin.  At the same time, conspirators and high-profile merchants worked to keep rice hidden away from the public, artificially keeping prices low.

People were going hungry and riots increased both in frequency and size.  The shogunate was forced to step in on numerous occasions, setting price floors and ceilings, while keeping a watch on devious merchants.

The Dojima Rice Exchange was officially organized by the shogunate in 1773.  This rice exchange demonstrated the economic effects of setting limits on prices and the use of contracts of financial value – basically staple prices, interest rates and paper money.

The merchants in the Dojima Rice Exchange would hold rice in their warehouses, exchanging it for money, and they also held accounts for many samurai and nobles, in essence becoming a sort of bank.

Farmers could expect to make a certain amount of money for the rice they brought.  The government also had its own warehouses, where the stored rice could have been set aside for emergencies.

In the end, the Dojima Rice Exchange was a regulating body that kept prices and the economy quite stable, keeping the flow of finances relatively steady for everyone.  The Dojima Rice Exchange was dissolved completely in 1939, as the Government Rice Agency took over its responsibilities.