I believe in currency futures contracts. I am proud to say I was present on the trading floor of the Chicago Mercantile Exchange back in 1972 when the very first currency futures contracts were ever traded. But the standardized contract size – one of the hallmarks of all futures contracts – has sometimes been a drawback for the smaller, retail trader. Since March 23, 2009, the world of currency futures trading has added a new dimension aimed at the self-directed individual trader. This new dimension is known as Forex E-micro Futures.
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E-Micro Currency Futures At A Glance
Now there are six currencies available for trading, each 1/10th the size of the regular futures contract and requiring just 1/10th the margin requirement of the regular sized contract. These contracts trade electronically on Globex at CME Group.
Brief Background and Illustration
On March 24, 2009, the spot (cash) Euro closed at 1.3451. This meant it would cost you $1.3451 to purchase a single euro. Now, let’s assume you wanted to trade euro currency futures (whether you wanted to day-trade or position trade won’t matter for this illustration). The regular sized Euro currency futures contract (also traded at CME Group) is based on a standardized 125,000 euros and the initial performance bond (or “margin requirement” if you prefer) which you would have to have in your account to trade one contract, is $6076.
If the euro moved against the US dollar by 10 pips (10 points to a futures trader), the profit or loss would be INITIAL_CONTENT.0010 per euro…regardless of the contract size. Since the futures contract is based on 125,000 euros, your profit or loss would be 125,000 x $.0010 = $125.00.
On the other hand, if you were trading the E-micro futures you would need just $608 in your futures account for initial performance bond requirement to trade and you could attempt to profit from the same 10 point move. The same 10 pip (10 point) price movement from 1.3451 to 1.3461 would result in a profit (or loss) of just $12.50 (12,500 euros x $.0010).
Benefits to Trading Micro Currencies in the Futures Marketplace
1. Trading in a regulated market. Futures trading is governed by the Commodity Futures Trading Commission and the brokers that offer accounts must be members of the National Futures Association.
2. Fully transparent markets and a fair and level playing field.
3. Customer Protection. Trading futures offers the safety of segregated customer funds and counterparty credit risk. The counterparty to all cleared trades is the clearinghouse of the Exchange.
4. All trades are executed on CME Group’s Globex electronic platform.
5. Cash Settlement. Micro currency futures are all cash-settled, just like stock index futures.
There is no risk or possibility of having to make or take physical delivery, as there can be with the regular-sized CME currency futures.
The Bank for International Settlements (BIS) estimates that retail currency futures trading has a daily turnover of $65 billion. To appeal to retail traders already active in currency futures trading, CME Group has kept the contracts consistent with each other and maintains identical settlement prices. But to appeal to traders accustomed to the nomenclature of over-the-counter (OTC) trading, the exchange quotes the micro-contracts in Interbank terms. This means that the euro, Pound and Australian dollar are quoted in American (direct) terms but the Yen, Swiss franc and Canadian dollar are quoted (and traded) in European (indirect) terms. [see contract specs below]
Forex E-Micro Currencies Available for Trading and their Contract Sizes
E-micro Euro: 12,500 euros
E-micro AUD: 10,000 AUD
E-micro Pound: 6,250 pounds
E-micro CAD: $10,000
E-micro Yen: $10,000
E-micro Swiss: $10,000
Now, smaller retail currency traders have complete and equal access to the book of prices and trading opportunities…..at 1/10th the margin requirement and 1/10th the risk.
Transactions in futures and forex carries a substantial risk of loss. The information and data in this report was obtained from sources which we believe reliable but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation by us for the purchase or sale of any futures or forex contracts.
Larry Schneider is director of business development for the Zaner Group (www.zaner.com); a Chicago-based independent introducing brokerage firm. Zaner provides futures and forex brokerage services to self-directed traders, broker-assisted accounts as well as traditional full-service account management.