What are the Best Tips for Trading Fx Derivatives?

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  • Written By: Dana DeCecco
  • Edited By: A. Joseph
  • Last Modified Date: 07 December 2019
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In order to effectively trade foreign exchange (Fx) derivatives, the investor must first have the fundamental knowledge of how to trade currencies. Currency pairs are the underlying asset of Fx derivatives. Derivatives are highly leveraged financial contracts. Unlike spot forex trading, derivative contracts have an expiration date and other technical specifications. The best tips for trading Fx derivatives include using a spot forex broker and taking advantage of the free services offered, such as charting software.

Currency futures are heavily traded Fx derivatives. Futures contracts on currency pairs are available in full contracts, mini contracts and micro contracts. The micro contracts are suitable for the average spot forex trader. The advantage to trading Fx futures is the guarantee of payment. Futures contracts are exchange traded and cash settled.

Contract performance is guaranteed by the futures exchange. There is little guarantee of payment in the over-the-counter (OTC) spot forex market. Futures trades are in standard contract sizes, and the exchange's clearinghouse is counter-party to all trades. Mandatory margin requirements are set for initial and maintenance margin. The trades are marked to market with a daily settlement.


Futures charting software and data feeds might create additional expenses. To offset these expenses the Fx derivatives trader could use the free services of a spot forex broker. Spot forex charting software is highly developed and provided at no cost to the trader opening a practice account. The futures broker platform could be used for order entry, and the charting software can be used for technical analysis.

Fx derivatives are also available in the form of options on futures contracts. This type of trading is very complex because the underlying asset of the option is also a derivative. Investing in futures options requires education in the fields of futures contracts and options contracts. Spot currency positions can easily be hedged in the futures market, making delta neutral and market neutral trading possible.

OTC options are offered by brokers in some countries. These options are unregulated, so a large broker or bank is recommended for trading these assets. The investor buying an option contract is risking only the premium paid for the option.

The seller, or writer, of an option contract can lose much more than the option premium. Combination spot and option trades are possible in the OTC market. These types of trades are easily constructed from the same account.

Fx derivatives in the equities market provide a means to trade currencies with an equities account. Currency exchange traded funds (ETFs) can be traded along with options on these funds. Complex option trades can be developed at a fraction of the cost of futures contracts. Currency ETFs track the price movement of spot Fx pairs. These contracts are exchange traded and are a comparatively safe way to trade in the Fx market.

There is risk involved in trading Fx derivatives. The forex market is highly volatile. Derivative contracts are complex financial instruments. Brokers provide educational resources and advisory services to assist the trader with market knowledge and decision-making skills. Many of these services are available at no cost to the trader.


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