The two main global currencies -- the U.S. dollar and the euro -- constantly vary in value against each other. You can use futures contracts to trade and possibly profit from these euro vs. dollar fluctuations. Set yourself up with some basic futures knowledge and then decide if you want to jump in, learn more and try trading some contracts.
In the jargon of currency trading, the euro is abbreviated as EUR and the dollar is USD. The contract between the two is the EUR/USD futures. One standard contract is worth 125,000 euros and is priced in dollars. So, if one euro is worth $1.30, one EUR/USD futures is worth $162,500. Don't worry, you need much less money than that to trade futures. There also exists an e-micro EUR/USD futures contract valued at 12,500 euros.
The futures price tracks the relative value of the two currencies and is quoted for the value of one euro. If you think the euro will go up against the dollar, you would buy the futures. If you think the dollar will be stronger -- a falling euro -- you sell contracts. With futures you can either buy or sell to open a trading position. To close the position, you just enter the opposite type of order. One of the benefits of futures trading is this ability to go for profits in either direction.
Futures Trading Account
To trade -- buying and selling -- the EUR/USD futures, you need to set up an account with a commodity futures broker. Most brokers provide trading software for your computer and lots of education material to help you learn about futures trading. You need to deposit enough money to cover the required margin deposit for the futures you wish to trade. The margin deposit is the minimum amount of money you must have to trade a contract. At the time of publication, the EUR/USD margin requirement was $3,300 per contract.
Risks and Potential
Using margin, you control the dollar equivalent of 125,000 euros with a $3,300 deposit. As a result, a small change in the exchange rate will produce a large profit or loss compared to the money you put up to trade. Currency fluctuations are measured in 1/100ths of a cent and each of those "ticks" is worth $12.50 per contract. If the EUR/USD changes by one cent, your one contract futures trade gains or loses $1,250. You need to be aware that with futures trading, while it is possible to book some nice profits, it is also possible to experience losses greater than the required margin deposit amount. Understanding the potential risks as well as the potential rewards is important.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.