In the previous lesson, you learned the differences between trading forex and stocks. Futures trading is another financial activity that is often compared to forex.
This lesson will focus on several aspects of forex and futures trading and how the two differ.
You’re now more than familiar with the fact that the forex market deals with currency pairs. It entails buying and selling currencies at the current exchange rate or a fixed price and date.
In the futures market, you are trading derivatives instead. Derivatives are contracts between you and another party. These contracts represent your agreement to sell an asset or security at an agreed-upon date and price.
For instance, you may enter a futures trade to buy 1,000 barrels of crude oil at USD 100 per barrel in two months. Conversely, you can agree to sell 1,000 euros at USD 1.50 U.S. dollars per euro in one month.
When trading futures, you can enter a long or short position depending on which direction you predict the market will take.
The table below shows more differences between forex and futures trading.
Criteria | Forex | Futures |
Market Hours | 24 hours a day, 5 days a week | Depends on the exchange |
Commissions and Charges | Little to none | Yes |
Trade Expiration | No expiration | 3 months |
Regulations | Little to none | High |
You can trade in the forex market 24 hours a day and five days a week, except during holidays. The currency market operates entirely electronically, allowing traders to access it virtually any time of the day.
While the futures market does not stay open 24 hours a day, it has a longer continuous trading hour duration than the forex market. This is because the futures market runs almost 24 hours a day and six days a week.
Unlike stocks, futures exchanges can operate beyond the regular trading hours. There are overnight markets, extended trading, and electronic trading hours (Globex), which run almost 24 hours daily. These periods can vary depending on each market’s region and the types of futures you are trading.
Most forex brokers offer commission-free trading platforms. When you trade through these brokers, the only “transaction fee” you typically pay is in the spreads or the bid-ask price difference. This is why forex trading is generally considered less expensive than trading stocks or futures.
In futures trading, you usually pay a commission fee per trade. These prices can vary with different brokers. However, futures trading entry costs are generally higher than those of the forex market.
Another major difference between trading futures and forex is how long you can hold trades.
When trading currencies in the spot FX market, you can hold your trades for an indefinite period. You can keep your trading positions as long as you have the capacity to do so.
The same cannot be said when you trade futures. The contracts you enter into when trading futures have an expiration date. Usually, these contracts expire after three months, but there are instances where expiration dates are set for years.
You can trade futures contracts up to the last date indicated on their expiration period. Once past this date, you can no longer trade it on the market. Instead, the contract will settle, and you will be obliged to deliver the underlying assets under the contract’s term (if you have a short position).
However, you have two options before a futures contract expires and settles: offset or rollover your position.
Offsetting your position means entering an opposite trade with an equal value to balance your original position.
When you rollover your position, you simultaneously offset your present position and enter a new one in a future contract month.
The forex market is decentralized. This means it doesn’t have a central exchange or a physical location. When you trade forex, you do so through an electronic network of banks, brokers, and other financial institutions.
On the other hand, futures markets are usually regulated by each country’s financial regulatory bodies. Most of them are also registered with the Commodity Futures Trading Commission (CFTC), the primary futures markets regulator in the US.
As futures markets have regulated and central exchanges, you will face significantly reduced counterparty risks trading in them.
In the next lesson, you’ll learn about margin trading, one of the most used strategies in the forex market.
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