Forex Vs Futures: Is Forex Market Same As Futures Contract
Forex vs futures are two different trading markets that have different trading opportunities for traders. The fundamental facts are extremely important to take the right decision.
Remember that you have to research thoroughly both trading types, to consider which option is best for you.
Additionally, always focus to minimize risk and maximize your return.
Consider this article as a guide from where you can pick necessary information regarding forex trading and futures trading.
What Is The Futures Market
A Futures contract is a legal agreement between a buyer and a seller. It is a financial contract where a seller will sell an asset to a buyer with a proper obligation.
The places where people buy and sell futures contracts are known as the future marketplace.
On the other hand, buying and the selling process happens with a pre-determined future date and time.
The futures market plays a key role in the financial marketplace. Financial future was introduced in 1972.
Moreover, physical commodities can be counted as a future contract. The future market mainly focuses on a few commodities like agriculture, precious metals, and energies, etc. The buyer is the long position holder and the seller is the short position holder.
You can also trade futures on stocks, indices, and bonds. Traders can trade the futures contract for long-term and short-term.
Additionally, the marketplace helps sellers to minimize the uncertain loss in the future or to avoid market volatility.
Both parties agree to sell and buy certain futures instruments or physical product on a particular day in the future. The price is set based on the future market price. The two parties set all these in a certain contract.
The market for a futures contract is quite risky for financial investors. If the prediction goes right for a particular asset, then it will bring a profit for you.
Suppose, you are predicting that a particular underlying asset will go up in price and you are ready to go long and buy the futures asset. After that, you can sell that at a higher price in the spot market. The profit could be counted from the price difference through the cash settlement.
What Is Forex Trading Market
The Forex market is a decentralized marketplace for traders. It is the largest marketplace for all traders. The Forex market transaction is 12 times bigger than the futures market.
The foreign exchange market is known as the FX market in short form. This is the place where mainly currencies are traded.
Forex traders are pairing one currency with the other currency. The currency pairs will help traders to trade the market according to the time zone or market session.
Breaking Down Of The Two Markets – Forex and Futures
Both futures and Forex market is regulated. Each marketplace offers unique advantages for their traders and investors. There are also a few disadvantages of trading these asset types.
Investing in the futures market is almost similar to invest in the stock market. Read this to know about the differences between Forex and Stock Market.
The most interesting part is that it is possible to trade futures on the foreign exchange currencies. In the futures market, traders do not trade actual currencies. They set a deal where they claim for a certain currency type with the price and settlement of a future date. You can count this Futures market as an auction market.
In this section, I will break down these two markets with a relevant example.
For an example of the Futures market, a dairy firm is selling milk, which costs $3 per liter, and an ice-cream parlor is selling ice-cream at $6 each. Both firms are making a profit at that price and for the future, they want to keep that price fixed. The investors of the ice-cream parlor agree that if the price for milk goes below a set rate of $3, then the investor agrees to pay the difference to the dairy farm owner. If the price of the milk goes higher than a certain price or the set price of $3, then the investor gets to keep the profits.
For the dairy firm owner, if the price of milk goes above an agreed rate, then the investor pays the difference and the seller gets the milk at a predictable rate. If the price of the milk is lower than an agreed upon rate, the seller or owner of the dairy firm pays the same price and the investor gets the profit.
For an example of the Forex market, suppose you want to trade the most traded currency pair EUR/USD. Here, the base currency is the EUR and USD is the quoted currency. You have to see two prices because one price will help to take the buying decision and the other price will help you to take the selling decision. The profit is calculated when a trader buys the currency pair at the low price and sells it at the high price in the spot market.
If you think, the euro will increase in value against the USD, and then you will buy EUR/USD. If you think the euro will drop in value against the USD, you sell EUR/USD.
9 Advantages Of The Futures Market
There are a few advantages of the futures market. These benefits make the market different from other financial markets.
- Hedging facilities
- The execution cost is low
- The exchange is centralized
- Low commission rates
- No interest charges
- No specific rules for day traders
- Advantages of tax
- Asset diversification
- All trading funds are safe and secure
Difference Between Forex And Futures
There are few differences between the Forex market and the futures market. It is obvious that the Forex market has a larger market capitalization than the futures market.
The Forex market offers three types of currencies for their traders. Under those types, you will find more than 70 currency pairs. The futures market offers a wide range of asset classes. You will get a diversity of products offering in the futures market.
For Forex traders, there are mainly four trading sessions available. You can trade from anywhere and anytime. Just keep the time zones in your mind while trading.
Trading futures depends on the time of opening and closing the stock exchange.
The futures trading hours depend on the exchange time. If any financial news comes out after closing the stock market then, the market volatility increases the next day.
On the other hand, Forex traders can perform trading on basis of the currency news.
The Forex market price depends on the best available bid price and the asking price. In the futures market, the price is determined by the two parties with an obligation.
The Forex market is not centralized so there is no trade transparency. Forex is the over-the-counter (OTC) and inter bank market. Trading Futures will bring more transparency because this is centralized and regulated.
In terms of market liquidity, then the FX market is the highest liquid market. On an average, the daily transaction of the Forex market is $5.3 trillion. Compared with the Forex market, the futures market is not that much immense. Compare with the Forex market, the daily trading volume is only a few billion dollars for the Futures.
In the Forex market, the broker’s fees will depend on the spread value. Whereas in the futures market, traders pay commission to the broker.
Forex market offers different trading advantages to the small traders. You can trade the Forex market in different ways after analyzing the whole market condition and prices. Futures do not provide as many advantages to their small traders.
The Future market offers less price certainty because there is no place to trade instantly. You can trade Forex on the spot because you can trade the market instantly.
Trading with the currency market bears minimal risk than trading with the future market. The loss of the future market is larger than the FX market.
In the Forex market, traders trade with a high leverage. Different brokers offer different leverage to their traders. In the futures market, that capital is called performance bond, or initial margin. The percentage is on an average 3-12% of a contract’s notional or cash value.
Forex market offers lower margin rate for the traders. The margin is different for day traders and overnight position holders. In the future market, the margin rate varies between 5 to 15% of the total contract value.
You can perform trade with a minimum amount of $10 in the Forex market. However, the minimum depositing amount depends on the broker’s platform. In the futures market, the minimum offering amount is not less than $500.
Similarities Between Forex And Futures Market
There are a few similarities between the two trading markets. People perform trade to earn a profit in the long run.
The way of earning a profit is similar for these two financial markets. Both Forex and futures traders will get a profit after buying at a low price and selling at a higher price.
The direction of the profit movement is the same.
The second similarity is the price movement. For both trading markets, traders predict the future price to perform the trade.
Both markets focus not on the value of the traded assets but on information about how that value will change.
The third characteristic is that both the markets focus on the short-term and long-term trading methods.
In the futures market, there is a certain limitation for the traders whereas in the Forex market there are no such types of limitations for the trades.
Both markets are available to trade on the news events. It is possible to trade Forex instantly after releasing any financial news.
Any news comes out which makes the market volatile, will not help future traders to trade instantly if the news releases after closing the exchange.
Forex and Futures trading has different attributes in the trading marketplace. This depends on the traders, how they want to earn profit from these two financial assets.
If the trader wants to trade for short-term, the Forex market is the best place for them.
But, if you want to buy and hold with an investment style than please consider the futures market as your best friend.
There is no option for right and wrong investment decision. The decision only depends on your risk tolerance capacity, investment style, and other factors.