Spot Market Versus Currency Futures Trading

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Billions have been made investing in both futures and Forex — but which one suits your investing style? Put simply, investing in the futures market is quite similar to investing in the stock market, except that your trade purchases a right to buy or a right to sell specific stocks or commodities at certain prices.

Defining Forex is quite simple. A trader will select two specific currencies and attempt to earn a profit based on swapping these currencies at opportune times. For currency trading in the forex and futures markets, a trader might assume that the value of the Euro will improve in the short term over the value of the US Dollar.

By using a regulated Forex trading house, as well as a host of sophisticated software and support tools, the trader can complete this currency swap with the intention of earning a profit. This is obviously an oversimplification of the currency markets, but the basic transaction is actually fairly straightforward.

Looking at both futures and Forex, which option makes more sense for the average investor, and which one will provide you with the quickest and safest return on your investment? Going forward we will define the pros and cons of both the futures market and trading in Forex. Here is one area where other investment opportunities find it quite difficult to compete with the Forex marketplace.

From Monday to Friday, currency traders have around-the-clock access to a network of other traders who can facilitate currency swaps. This contrasts sharply with the futures market, which relies on the opening and closing bells of the stock exchange to bookend the trading day. If important news comes in from Japan, Europe, or virtually anywhere around the globe while the US futures currency trading in the forex and futures markets is closed, the next morning may present market volatility for futures traders.

In contrast, Forex traders have the ability to react immediately to any global events that may cause a shift in currency value. To cut to the chase, the Forex market is the largest and most liquid marketplace in the world. To the trader, this means that currency positions can be liquidated and stop orders completed without much concern for slippage with the exception of trading within severely volatile markets.

The Forex market does not work within a specifically regulated and centralised marketplace. When trading in futures, commissions and other related fees are simply part of the course, and must be considered when creating a financial plan based on your investments.

While there is always going to be some level of risk within any investment opportunity, the process of investing in currencies through a reputable trading firm automatically provides some risk mitigation in the form of position limits. Online trading platforms will automatically create a margin call if the currency trading in the forex and futures markets margin exceeds the amount of trading capital within the related account — thereby minimising losses and protecting your investment.

When investing in futures, you may be liable for significant deficits if the position is liquidated at a loss that is larger than what you had in your related account. Though the currency trading in the forex and futures markets of leverage can be both a good thing and a bad thing, having access to high leverage positions can enable you to make serious profits with a minimal upfront investment.

Forex traders often allow up to a to 1 leverage ratio, though most new traders should start with a much lower ratio to hedge against the potential for losses. As in most things, there is no one winner when it comes to determining which is better — Forex or futures. If you enjoy participating in an investment that rewards quick thinking, market awareness, and continual learning, then the Forex option is likely for you.

From a market trade volume viewpoint only, Forex drives more than times the daily trade volume compared to futures — possibly the greatest indicator of the difference in potential for profits between these two investment opportunities. Contracts for Difference CFDs and margined FX are leveraged products which carry a high degree of risk to your capital.

Prices may move rapidly against you and may result in you losing more than your initial deposit. CFDs and FX may not be suitable for all investors and you should fully understand the risks involved before opening an account.

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Over the past few months of teaching with Online Trading Academy , a question has come up more and more often with new students.

Futures or spot forex? Believe it or not, nearly every decision we make in trading much like life has potential positive things and potential negative things associated with that decision. Both a positive and a negative. Being a well-rounded trader using multiple asset classes allows us to take advantage of every type of market, being trending or sideways channeling.

The most significant difference between a futures account and a spot forex account are the actual things that you can trade. With a futures account, you can trade stock market indexes, bonds, metals like gold and copper, cattle, wheat, even currencies!

However, your choice of currencies is a bit limited. When considering the choices available for trading with a spot forex account, in the United States we are limited to trading just currency pairs some foreign countries allow trading in metals in their forex accounts. A second very significant difference between the two markets is the amount of actual dollar risk it takes to trade them. More contracts would obviously add more dollar risk. There are several e-micro futures contracts you could trade to make your dollar risk even less, but these are only on a few currency pairs.

In addition, the volume on these contracts is pretty low. When trading in the spot forex market, trading micro lots at most brokerage firms will allow you to trade with stops that actually cost you as little as one dollar! Yes, you read that right. Yet another major difference in these markets is the cost to trade, based on the margin required to buy one contract in futures or a lot in spot forex.

The cost to purchase one contract in the futures markets varies by several factors: Some lots are much cheaper, some are more expensive. So there you have a few of the big differences.

The very basics are: With a spot forex account, you get to trade only currencies, but more of them. In the futures market, generally your expenses will be higher when measured by dollar risk, amount needed to trade, and cost to do the individual trades.

Spot forex then has the benefit of being cheaper to trade and learn the skills. As stated earlier, every decision you make in trading has potential positives and negatives, and it is up to you to decide which is better for your circumstances. Disclaimer This newsletter is written for educational purposes only.

By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader.

The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.