Hot Features
Premium
Trade like a pro: Leverage real-time discussions and market-moving ideas to outperform.
FX securities are foreign exchange derivatives – financial instruments whose value is based on the exchange rates of two or more currencies.
Derivatives allow investors to speculate on the movement of currency prices without actually buying and selling the underlying assets.
They differ from spot Forex trading, where a transaction is an agreement to trade one currency for another at the prevailing price (or spot rate), which is finalized in two business days, because they are speculating on what is going to happen to the exchange rate in the future.
Different Types of FX Derivatives
Common examples of forex derivatives are forwards, futures and options contracts.
Forwards
A forward is an agreement between a buyer and a seller to exchange currencies at a predetermined rate, on a future date. The price is set on the transaction date but the money is not exchanged until the maturity date. Forwards are traded as private agreements between two parties, with no intermediaries.
Futures
A futures contract is where the buyer and seller agree to a transaction at a set price, to be fulfilled on a future date. Forex futures use standardised contracts and are traded on an established exchange, primarily the Chicago Mercantile Exchange.
Futures are often used by companies that carry out much of their business abroad, and want to hedge against being hit by currency fluctuations.
Futures have a potential for losses because the exchange rate can move significantly in either direction, and the holder is obliged to settle regardless of whether they make a profit or a loss.
Options
Options give the holder the right, but not the obligation, to buy or sell a currency at a specified price within a certain timeframe. This means the buyer can choose to settle the trade if it’s profitable, or let it expire if it is not.
Options have limited risk because the maximum that can be lost is the premium paid for the option.
How To Trade Forex Derivatives
Here is what’s involved in trading forex derivatives.
Choose a broker
Select a reputable broker that is regulated, has low fees and offers the currency pairs in which you want to trade.
Look at the features offered by the broker and balance them with the price: do you want to prioritise low fees, or go for a more feature-rich platform?
Click here to find a forex broker
Learn About Forex Derivatives
Before you start trading in derivatives of any kind you need to do your research and learn how they work. Trading in derivatives carries risk and you need to understand the markets in order to avoid losses.
You also need to learn about currency markets and gain an understanding of what factors affect exchange rates.
Set Up A Practice Account
Most brokers will let you set up a demo account so you can practice trading without risking real money. This allows you to try out your trading strategies and see whether they are successful or not, without risking any real losses.
Use Risk Management
You need a risk management strategy to ensure any losses you make are minimised. Techniques to use include:
Position sizing – don’t put all your funds into one transaction because if you lose, you lose everything. (In other words, don’t put all your eggs in one basket!)
Stop-loss orders – these automatically close your position when the price reaches a certain level, which limits your potential losses.
Take-profit orders – these close your position when the price reaches a predetermined profit target, which prevents a sudden reversal from causing losses.
Limiting leverage – you need to understand how leverage works because it can be risky. It allows you to control larger positions with a smaller amount of capital, and this magnifies profits – but it also magnifies losses.
Monitor and Manage Your Trades
Once you have opened a contract for a forex derivative you need to keep on top of it to ensure you maximise profits and minimise losses:
Monitor your position – Keep track of your open positions and any price alerts you’ve set up.
Stay informed – Follow the latest news and events that could impact the forex market.
Manage your risk – Use risk management tools and strategies to protect your capital.
Click here to find a forex broker
FAQs
1. What is a forex derivative?
A forex derivative is a financial instrument where the value is based on the exchange rates of two or more currencies. It allows investors to speculate on the movement of currency prices without actually buying and selling the underlying assets.
2. Can beginners trade in forex derivatives?
Yes, but it is risky so you need to educate yourself on how derivatives work, how the forex market operates, and risk management techniques.
3. What risk management techniques should I use when trading forex securities?
Some of the risk management techniques used for derivatives are position sizing, stop-loss levels and take-profit levels.
2. Can I use leverage when trading forex securities?
Yes, you can use leverage when trading forex securities, but beware because although leverage magnifies your profits by letting you control larger positions with a smaller amount of capital, it also magnifies your losses.
Click here to find a forex broker
