Forex vs Futures

2018-04-17 08:41   来源:FxZoo

There is so much choice for today’s individual investor but one question that has been posed to the Zoo is “Should I be trading Forex or Futures?”. Let’s take a closer look at the various attributes of both:

24 Hours a day 5 days a week

As previously discussed the Retail Forex market is open 24 hours a day 5 days a week. We have discussed the issues resulting around weekend gaps that are true for both Forex and Futures. However, one major difference is the fact that Futures are traded on an exchange that has formal opening and closing times. As a result, there is a much higher likelihood that a Futures trader will experience overnight gaps from the previous days close to the current days opening. Whereas someone trading in the Forex market will experience a market that does not close, that said as market participation changes throughout the trading day traders will occasionally see wider pricing as a result of reduced liquidity. But forex has fewer, or minimal, gaps in such times. Even in the recent UK EU Referendum (Brexit) markets were volatile but pricing remained consistent. Imagine you had bought GBPUSD on the Thursday close, just before the EU Referendum result, at 1.4850. You could have traded GBPUSD throughout the night – taking profit at 1.5020. However, by early Friday morning, once the result was in that the UK had voted to leave the EU, GBPUSD was trading around 1.35. If you were long on the Futures Exchange…. Ouch!! You would have lost a significant amount of money (or maybe all of your invested capital!!) as you would only be able to sell out your long when the Exchange opens.

Depth of Liquidity

The Bank for International Settlements Triannual survey of 2013 estimates the global Forex Market has a “value” of USD $5.3 Trillion per day!!! A market of such size can absorb significant trade volume and has a huge number of Market Participants globally. These vary from large International Banks, Corporations, Funds, Governments, Countries and so on. One of the largest Futures Exchanges is the Chicago Mercantile Exchange (The CME) where you can trade a large variety of Futures contracts (FX, Options, Commodities etc.). Typical average daily volume traded on the CME is less than USD $50 Billion (a fraction of the Forex Market!) more information on CME volumes can be found here.

Trading Costs

In order to trade on a Futures Exchange, you need to be a member, or trade through a registered Broker. As such there are Exchange fees that will be passed onto you. These will vary Broker to Broker and will vary with the instrument you are trading. Typical CME fees are available here. Whilst these fees may be minimal they are considerably higher than any fee you will be charged in the Forex market. Many Brokers will offer you a commission free price (the fee is included in the spread) or a transparent uniform commission structure on more competitive pricing. More and more Broker in Forex are competing for business so any fees are being driven lower.

Certainty of execution

Most Forex brokers offer Fixed Spreads or Instant Execution that ensures its clients get the price they are executing on. Because the Forex market has such tremendous depth of liquidity slippage, of any kind, is minimal (depending on the underlying market conditions). When trading on an Exchange there is a Market Order Book that is visible to all Exchange participants. As a result, an Exchange has less visible orders and, as a result, the depth of market can be significantly less than the depth of book in the Forex markets where orders are not “centralized” in one place.

Risk Mitigation

Risk is minimized in the spot forex market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account. These levels vary from Broker to Broker but help ensure a trader never loses more than their original investment. Some brokers will also offer Negative Balance Protection, whereby even if the market gaps significantly you will never lose more than your initial investment. The Futures markets do not offer such risk mitigation. Because the market has a formal open and formal close your position will be “marked to market” and, as a result, any significant gaps from the close will result in you losing more than your initial investment.

#tradesafely #fxzoo #doublehit




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