Trading foreign exchange futures can be very exciting, but remember it is also VERY HIGH RISK....

Here's how it works....

First, what are FUTURES?

Futures refers to buying and selling items at a fixed price in the FUTURE.... Two types of people trade in futures - hedgers, and speculators....

First, the HEDGERS.... These are those who use futures as a protection in their business....

For example, a wheat farmer might be spending the money to produce wheat NOW, but he's worried that when the time comes to sell the wheat, its price will drop ....

In order to protect himself against that possibility, he might take out a CONTRACT to sell the wheat in the future, but at today's price. That way, if the price drops in the future, he has a guaranteed profit margin....

However, if the price of wheat goes up, then he has to PAY the shortfall on the futures contract, so while he still makes a profit, he makes less than what he otherwise would....

However, the farmer reduces his risk, in that he is still guaranteed of locking in a profit either way....

A SPECULATOR does the opposite, and takes on more risk. This is someone who, like the farmer, may take a contract to buy or sell some commodity in the future at a fixed price. Then, if the price goes the way he thinks, he makes money, but if it goes the opposite way, he loses money....

But the key is, all it is is a contract in the future, at a fixed future price, between a price on one hand, and some sort of product on the other hand....

FX (foreign exchange) Futures, or currency futures, works exactly the same way. The only difference is that instead of fixing the price of wheat, you'd be fixing the exchange rate between two currencies (like between the US dollar and the Japanese yen, for example).

If the price goes the way you think it will, you make money. If it goes the other way, you lose money.

Because it is just a contract, you can spend very little money to do this. The company which presented the seminar I attended - Tricom ( www.tricom.com.au ) said you only need a 3% margin. That means, to have a contract to buy or sell $1 million in FX futures only requires $30,000 !

Or, in smaller terms, with just $3,000, you can buy or sell FX futures for $100,000.

Here's how it works to make (or lose) money....

Let's say I believe the Mexican peso will go down compared to the US dollar....

Then I might take a contract to sell 1 million Mexican pesos for the current rate, which (let's say) is 10 US cents per peso, but 6 months in the future.... (That comes to a $100,000 contract.... )

Now, let's say that the exchange rate changes so that 1 Mexican peso is now only worth 9 cents in US currency....

Although the current rate is only 9 cents per peso, I have a fixed contract to sell them at 10 cents per peso. That means, I can buy Mexican pesos for 9 cents each on the open market, and sell them for 10 cents each.

My contract is now worth some money, since I could make a direct profit of 1 cent per peso. It sounds small, but with this 1 million peso contract, I could directly make $10,000 just from my contract.

However, let's say that the peso instead goes to 11 cents per peso. Now, I lose money, because I'm forced (by the contract) to buy pesos on the open market for 11 cents each, and sell them for 10 cents each. That means I lose 1 cent per peso, or I lose $10,000.

Now, here's how so much money is made.... For a $100,000 contract, you only need $3,000 or so. But, as we saw, just a 10% change in price (from 10 cents to 9 cents per peso), means that $3,000 could become worth $10,000 - or more than a 300% win or loss. You can MAKE, and also LOSE, a lot of money.

That's the essence of how futures works....

In practice, you generally don't make the contracts, but other people do, and these contracts are bought and sold.

And you have to keep your 3% margin, which means that if your $100,000 contract becomes worth less money, you would have to put in more money so that you always have at least the minimum 3% of the worth of the contract.

So if you don't keep that 3% margin, your broker will automatically sell the contract. That means you wouldn't lose more money than you put in - however, you could lose it all, or make some great gains.

It is fast-paced, high-stakes, high risk speculation.

Currency futures is also a 24-hour thing - currencies are being traded for 24 hours a day around the world, so the market never closes (except for about a day on the weekends).

The currency market is the biggest market in the world, outstripping the share market in its sheer size.

I wouldn't go into currency futures (or any other kind of futures) without a good advisor at the absolute minimum!

And at the seminar I attended, they recommended putting NO MORE than 10% of your assets into FX futures, because of the high risk involved....

Dien Rice