Is there more leverage in currency futures, or FOREX?
For those that aren’t aware, there are at least two completely separate venues for currency speculation; exchange traded currency futures, and off-exchange FOREX. Equity market ETFs come in a distant third in regards to popularity and efficiency. There are certain advantages and disadvantages to each arena, in fact we’ve touched on that topic in a previous edition of this column, but when it comes to leverage and margin there isn’t a clear cut winner.
Let me first start by saying that more leverage, which is equivalent to a lower margin requirement, isn’t necessarily preferable. In fact, higher leverage is a sure-fire way to decrease the odds of trading success. With that said, it is important to be educated on the margin requirements in each venue.
Although the Intercontinental Exchanges offers some currency futures products, when traders speak of currency futures the general assumption is the CME Group’s suite of foreign exchange products. The CME Group traded currency futures require specific margin deposits. These margin deposit amounts are determined by the CME Group itself. Each futures brokerage firm offering CME Group currency futures to its clients must charge their clients a performance bond in, at least, the amount the CME Group has designated as the margin. Some brokerage firms will actually ask clients to put down more margin than is required by the exchange. This is known as an “up-charge”. If your broker does this, you should probably look for a new broker simply because it insinuates corner cutting by risk management, and there is no telling where they are doing so in other areas.
Margin vs. Day Trading Margin
Here is where things get tricky; clients that are day trading currency futures are likely granted a margin requirement lower than the exchange designation by their brokerage firm as long as they close the position at the end of the trading day. This is known as day trading margin, and can range from half of the exchange posted margin to as little as 5 to 10%. Specifically, if the margin to trade 100,000 units of the Euro against the dollar (equivalent to 1 full-sized futures contract) in the futures market is $3,400 a futures broker might let you buy or sell a contract with $1,700 or less in your trading account assuming you exit the position before the end of the trading session.
Read more about where you get more leverage when trading in the August 2015 issue of Stocks & Commodities Magazine