Forex vs Futures | Forex vs Stocks | Troubleshooting
System Requirements | Risk Management

Forex versus futures

NOTE: When comparing forex trading to stocks or futures, consider that forex trading is not conducted on a regulated exchange and as a result there
 are additional risks associated with trading forex.

With a daily volume of $3 trillion, the Foreign Exchange (FX) market is the largest in the world – 30 times larger than the combined volume of all U.S. equity markets Historically, the Banks dominated the Forex cash markets and offered ‘Interbank’ dealing spreads (typically 5 pips or less) only to their largest or most valuable institutional clients. 

In contrast, the dealing spreads typically available to other market participants were much wider (50-100 pips or more in many cases), which essentially excluded their participation in the currency markets.

Technological leaps  have opened up this exciting market to small speculators. Real-time Interbank dealing rates allow the trader to place a buy or sell order and see it executed within a fraction of a second. 

Highly trending markets

Because the foreign exchange market gaps are very limited (the market is closed briefly on weekends), it's not dramatically affected by buying programs that allow it to be easily manipulated. The forex market offers some of the smoothest trends available in any market. No other market can come close to the amount of monetary volume and participation as the forex market making it a haven for traders not having to deal with gaps and price movements, erratic spikes and other choppy market conditions more commonly experienced in the lower volume markets, like futures or options. 

Better Leverage

Trading in the spot currency markets provides advantages over trading currency futures contracts. One of the main advantages for traders trading spot currencies is the margin rate or leverage that clients are given. In spot currency trading, customers receive one low margin rate for trades done 24 hours a day. In currency futures trading, the client has one margin rate for "day" trades and one margin rate for "overnight" positions. This can become a hassle for traders and decreases the overall tradability of the currency futures markets. 

NOTE: Higher leverage is always subjected to substantially higher risk.

24 Hour Trading 

Since the forex market, in a sense, follows the sun around the globe the market, it rarely experiences periods of illiquidity. What this means is that any trader in any time zone can trade forex at any time during the day or night. You no longer have to wait for the market to open when news has already hit the streets or have to stop trading because the CME, CBOT or other American futures pits have closed for the day. This gives the forex trader added flexibility and continuous market opportunities that just aren't available in futures.
To explain the global effect on the forex market, there are three main economic zones that are linked throughout the world. For instance, when the Pacific Rim markets such as Japan and Singapore begin to slow, the European markets of England, Switzerland and Germany begin. The North American markets of the United States, Canada and Mexico follow these forex markets. As the North American markets begin to slow down for the evening, the Pacific Rim starts their trading day again. This example shows that you are no longer limited to trading using a comparatively short, trading day offered by U.S. markets only.

Foreign exchange is one of the few true 24-hour markets. When trading forex, clients enjoy unparalleled liquidity 24 hours a day. In many futures markets, however, the overnight access available to traders is simply window dressing. The lack of liquidity and restrictions on what types of orders a client can place make trading and protecting positions a nightmare.

A good example is the Globex market. While the Globex market is only closed for a 15-minute period each day, the liquidity available after the open outcry market is closed in Chicago is normally very low. Spreads are wider and the ability to place larger orders is non-existent. Because of this, most volume traders are forced into trading the exchange for physical market overnight. The EFP market is the spot market priced in futures pricing. EFP's, however, come with additional fees and are not available from an electronic interface. Electronic access, speed, no fees and unmatched liquidity, 24-hours-a-day makes spot forex the choice for the foreign currency trader.

Futures versus Forex quotes

When dealing with a dollar-based currency like the Dollar (USD) versus the Swiss Franc (CHF), the futures price is the inversion of the cash price, without the forward points added. For example, if the cash price for USD/CHF is 1.7100/1.7105, the futures equivalent is .5894/ .5897. By inverting the futures price to compare it to cash, you can readily see that the dealing spread is 10-pips. That’s twice the 5-pip spread available in the cash markets.

Conversely, the cash prices for non-dollar based currencies such as the Euro (EUR) and British Pound (GBP) are very similar to their futures prices, again without the forward points included. For example, if the cash price for EUR is .8830/ .8834, the futures price is .8865/.8873.

The bottom line is trading cash just makes sense. The cash market is more liquid, easier to use and is much more aggressive in its pricing.
However, also consider that forex trading is not conducted on a regulated exchange and there are additional risks associated with this type of trading.

Forex Methodology

Foreign exchange is the principal market of the world. If you study any market trading through the civilized world everything is valued in money, the root of all pricing. Global finance is the distribution and redistribution of money throughout different channels and different financial derivatives. Trading spot currencies can be done with many different methods and you will find many types of traders. 
From fundamental traders speculating on mid-to-long term positions based on worldwide cash flow analysis and fixed income formulas, to the technical trader watching for breakout patterns in consolidating markets or the Gann fanatic looking to duplicate the techniques of W.D. Gann, the methods for trading foreign exchange are many. Spot currencies are a great market for the "trader". It is where "big boys" trade and can provide both large profit potential as well as commensurate risk for the speculator.

Try demo trading RISK FREE for 30 days. With a demo account and trading software, you can practice currency trading at your own pace, using the same real-time data and quotes available to Live Account holders.

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