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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 instance, 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 market 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 predetermined 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 concept 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. Open a live account Fund your account. Demo account Live account.