Futures vs Forex Trading: What Are the Differences?

The Forex market has a daily trading volume of $6.6 trillion, making it the largest financial market in the world.

Trading and investing can be ideal for people who want to make profitable investments. With so many investment options available, however, it can be difficult to know where to begin. Both Forex trading and Futures trading are very popular choices, and they both present a lot of opportunities.

So when looking at Futures vs Forex, how do they compare? Keep reading to find out.

What Is Forex?

Forex is short for foreign exchange, and it’s a market that allows people to trade in different currencies based on their exchange rate. Traders can speculate how the values of currencies will change and make trades that will ideally lead to a profit for them. Forex trading has become one of the largest financial venues in the world.

How Does Forex Work?

If you want to trade foreign currencies, you need to open a currency trading account. You can do this through either a Forex brokerage or a full-service financial brokerage. There are various Forex brokerages available, making this a highly accessible form of trading.

When trading currencies, they’re paired together, so as you buy one currency, you’re selling another. You can trade all different global currencies, regardless of the denominated currency of your Forex account. If your account holds US dollars (USD) for example, you could still buy euros (EUR) while selling British pounds (GBP).

Your broker will facilitate all transactions, and any profits and losses are your responsibility. “Majors” are the most popular currencies which generally have liquid trading. “Minors” or “exotics” are less common and can be traded via cross pairings with majors.

Retail Forex trading is also available which is done over the counter. These generally allow smaller trades, sometimes as small as 100 units of a currency. This can be ideal for those wanting to trade with a lower risk.

The Forex market isn’t open 24/7, and it’s important to know when it’s open for your region. You can check out this Forex trading guide for different borsen zeiten (exchange times).

What Are Futures?

Futures have their value based on an underlying asset, making them a derivative trading instrument. As such, they’re traded through contracts. The price of the contract is based on a future estimate of the value of the asset – hence the name.

Futures trading generally happens on organized exchanges. These exchanges execute all transactions, and they’re then finalized by a regulated clearinghouse.

Back in the 19th century, farmers would seek to guarantee future sales of their goods. Over time, this developed into the Futures market we see today which allows the trading of bonds, equities, commodities, and currencies.

How Do Futures Work?

Futures are contracts, and every contract has an expiration date. The agreement is that one party will buy a specified amount of an asset which they will receive on a set date. The other party must sell it on that date for the price of the contract.

Most Futures contracts have four or more expirations per year. Once someone has bought a Futures contract, they’re free to sell it on the secondary market at any time before it expires. Once it reaches the expiration date, it can no longer be traded.

One of the most common purposes of trading Futures is as a hedging strategy. People want to ensure they’ll get a set price for the asset they’re selling at a later date. Those buying the assets are considered “speculators” who want to receive the assets for a price that is lower than the future value.

While Futures trades are based on a range of assets, these days the assets themselves are rarely delivered. Most Futures contracts simply end in a cash settlement after the expiration date.

Futures vs Forex – Key Differences

While both markets are designed for the trading of assets, there are some key differences. Understanding these will help you decide which of these markets is most suitable for you.

Forex trading is traditionally done over the counter or through Forex Brokerages. Futures are traded through formal exchanges.

Futures use expiry dates, and they have a set number of these per year. With Forex, you can make trades at any time, as many times as you choose. This allows for a bit more flexibility.

Futures contracts are independently priced based on the parties involved in the contract. Spot Forex values, however, are constantly changing and are dependent on the values of other currencies in the market.

Leverage is key when it comes to trading. Forex pairs are generally traded with significantly more leverage than Futures contracts.

It’s worth noting that the liquidity varies based more on the product itself than the market. This can have an effect on slippage rates for both markets.

In the Forex market, central banks and governments can intervene. This can create extreme volatility, which can be beneficial or detrimental depending on your investment strategy. Futures contracts can be volatile at times, but generally less so than Forex pairs.

Should You Trade Forex or Futures?

When comparing Futures vs Forex, the differences can be clear, but it can still be difficult to decide which you should be trading. You need to think about how you want to trade in terms of long/short term, the resources you have, the risk you’re willing to take on, etc.

The most important thing is to ensure you fully understand what you’re trading and how you’re doing it. Take the time to understand the markets so that you can develop a strategy that will help you maximize profits and avoid losses.

For more business articles, check out some of our other blog posts.

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