Forex vs. Futures
Trading in the stock market is risky business these days. Since the financial meltdown of 2008, many people have turned to alternative investments like futures and Forex. However, before you take the plunge, you should understand what these markets will (and won’t) do for you.
Forex is the largest financial market in the world. The average traded volume exceeds $4.2 trillion per day and includes all the currencies in the world.
Since there is no central marketplace for the currency exchange, all trades are conducted “over the counter.” Trading is accomplished through a broker, 24 hours a day, and five days a week with a short time on the weekend when the market is closed.
Technically, the markets in any given country do close at the end of a business day, but since the market is global, another market opens as one closes. For example, at 5:00 pm EST on Sunday, trading in Sydney, Australia begins. At 7:00 pm EST the Tokyo market is open for trading. London opens at 3:00 am while New York opens at 8:00 am EST. New York’s market closes at 4:00 pm but at that time Sydney’s day is just starting. Here is an article on how to determine best Forex trading hours.
There are no minimal commissions when doing Forex trades. Trades are also executed very quickly. Finally, since trades are executed in a timely manner, there is a certain amount of price certainty in your trading activity. When you purchase futures contracts, there is a limited guarantee of execution speed. Until the trade takes place, you won’t know what price you purchased the contract at and brokers typically quote prices in terms of the last trade, not the price for which the contract will be filled.
A futures contract is a special type of financial contract called a “derivative.” Two people agree on a set price for a commodity to be delivered at a particular price. When a buyer buys a futures contract, he is agreeing to buy a commodity that the seller has not yet produced. However, the buyer is buying that commodity at a fixed, set price. The seller must sell the commodity at that set price.
Compared to the Forex market, the futures market is small. It only trades $30 billion per day. While the market is liquid enough for most investors, there is still significant risk involved in buying a futures contract. Trades are not always executed immediately, making it difficult to know exactly how much you can buy and sell commodities for.
If you’re looking for simplicity, Forex offers you a much better deal that the futures market. The fact that the market is very liquid and is easy to access means that you should never have problems liquidating a position.
With futures, your trading choices are many. With Forex, there are only several dozen possible currencies to trade. However, most people who trade in the Forex market stick with the 4 main currency pairs: EUR/USD (the euro and the U.S. dollar), the GBP/USD (the British pound sterling and the U.S. dollar), the USD/JPY (the U.S. Dollar and the Japanese yen) and USD/CHF (the U.S. dollar and the Swiss franc). This helps to simplify the Forex trading platform and make it easy for most people to enter the market.
Guest post contributed by Elizabeth Goldman.
So, I’m still interested in your opinion: Forex versus Futures. What should I choose?