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Forex Spot and Futures Markets Are as Much Alike as They Are Different

Site Administrator | November 22, 2011

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The popularity of trading in our currency markets has increased at a geometric rate over the past decade, fueled by easy access and sophisticated trading platforms that plow through mountains of data to suggest high-probability trade setups for newcomers and experienced traders alike.  Investors, disenchanted with stocks and the suspicion of insider manipulation, have transferred in droves where daily volume tops $4 trillion and the threat of manipulation is non-existent.

Depending on your personal trading style and risk tolerance, there are a multitude of ways to participate in this highly liquid market.  A forex platform can be accessed at any number of brokers that will trade on the spot market, buy and sell futures contracts, deal in options, or delegate the forex trading to a third party or “mirror” his individual trades within your portfolio.  While most forex traders are accustomed to retail forex trading through a broker, a growing host of currency enthusiasts are shifting to trading in forex futures contracts offered through the Chicago Mercantile Exchange (“CME”).

Dealing in the spot market is very similar to the CME/Globex futures exchange.  High liquidity, quick order execution, and being part of the largest market in the world come with each genre.  Currencies are physically exchanged in the spot market, but retail forex brokers actually close and re-open their client positions each evening to prevent this event from ever transpiring.  A futures contract is binding between two parties for currency delivery at a future date, but traders usually close out their positions well before the actual expiration day.  Both mediums provide a speculative environment where gains can be realized by following trends and using technical tools to optimize market entries and exits.

The differences are more structural in nature, but may be the deciding factors as to which medium appeals more to your individual tastes.  The advantages of choosing either the spot or futures market are detailed below.

 

                Spot Forex Market

 

  • The informal nature of the forex market allows for a continuous trading cycle that begins on Sunday in New Zealand and ends in New York on the following Friday.  As one exchange closes, there are always others that are active.  Futures are similar, but they are closed for an hour each day;
  • There is more flexibility related to position sizes in the spot market.  Mini and micro-lots make entry requirements less;
  • More leverage is available in the spot market, but this benefit is a “double-edged sword” that can magnify gains as well as losses.  Margin requirements are higher with futures, making it easier to trade in the spot market with less capital;
  • This market is so vast and liquid that executions happen in nanoseconds;
  • Typically, a “spread” will be your entire cost commitment.  Other fees and commissions do not apply unless you utilize a third-party trading option.

 

                Futures Contract Market

 

  • The major benefit here is that electronic trading is facilitated by the CME that guarantees the financial safety and adjusts your accounts daily;
  • Standardized trading units and trading rules level the playing field for all participants so no one is at a “size” disadvantage.  The best price trumps, but executions can occasionally take a few seconds to complete with broader spreads, especially if the contract is near its expiration date;
  • Pricing is competitive due to the breadth of the market and the diversity of member participants, both large and small.
  • The lack of counterparty risk has been a major drawing factor.

 

Similarities abound, but your choice will generally come down to personal style.  Interested in being a part of the TradingPub's trading community?  Be sure to join us for our next event on Technical Analysis and Support and Resistance.

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Risk Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial financial risk. Views of guest commentators do not represent those of TradingPub.com.  Article intended for educational purposes only and not meant in anyway as a soliciation to buy or sell certain securities.  Please consult your personal financial advisor before using this information for your own trading purposes.