Currency Trading: Should We Trade Forex or Futures of the Forex
Currency Trading: Should We Trade Forex or Futures of the Forex
Foreign Exchange is the international financial market where currencies from all countries are bought and sold freely. This is known as currency trading. Currency trading is a non-stop cash market where traders speculate on changes (ups and downs) in exchange rates. Trading operates through a global network of brokerages, banks, corporations and individual investors trading one currency for another. There is no central, physical exchange like financial equity markets or futures markets. Trading takes place nearly 24 hours a day. This is extremely liquid because there are always willing buyers and sellers for each currency being traded, which means you can enter and exit a position quickly.
Most investors trade the Forex Market if they want to trade currencies. For larger investors (hedge funds and institutional traders), this makes perfect sense. Tthe Forex Market has a daily average volume of $1.9 trillion contracts. But what about individual investors? There is a market more suited to the small number of contracts they tend to trade? The answer is yes, the Futures of the Forex.
With Futures of the Forex, individuals can trade the same currency pairs that they trade in the Forex market. But they will trade on the Chicago Mercantile Exchange(CME). What is the benefit? There are several benefits to small investors for trading Futures over Forex.
First of all, over 90% of all Forex traders lose their entire portfolio within the first 6 months, just ask the broker. With the marketing hype on trading Forex, you would think that everyone is just making money hand over fist.
Futures brokers are regulated and overseen by the SEC. There is no oversight for many Forex brokers.
Forex traders tend to use 20 minute charts. Futures traders can profit from just smaller changes in currency, using 1-2 minute charts.
Here's the main difference. With Forex trading, the difference between the bid (what you can buy a contract for) and the ask (what you can sell it for) is 3 pips. 1 pip = 1 price movement. In stocks, 1 price movement = 1 penny. So with Forex, the broker takes the first 3 price movements as the cost of getting into the game. That means there has to be a price movement of at least 4 pips just to break even. In this way, Forex traders start every trade in the red, crawling out of the whole.
Futures have tighter spreads between the bid and the ask prices, just 1 tick, while in the Forex Market it is often 3-5 pips. There is no interest charge or rollover fee every other day. Transactions costs are applied to the round turn, not both in and out. In fact, brokerage commissions + exchange + regulatory + transaction charges are less than the Forex PIP spread.
With Futures of the Forex, using the same currency pairs, the broker takes about 1/3 of the first tick (1 tick = 1 pip), and then the broker does not get any more. You are not starting every trade in the whole.
Currency price movements may only be 1-3 ticks, especiall in a flat market. Therefore the Futures market is set up for those traders who want to trend trade and use a 20 minute chart as well as scalpers who want to use a 1 minute chart and steal 2-3 ticks. That's just not possible trading Forex.
Investors receive better cost advantages with currency futures over the Forex spot. Here's an example of trading 1 Forex USD/EUR contract vs. 1 Futures of the Forex (6E) contract. Each Futures tick is worth 12.50. Futures commission and all fees are about $5, the average charged by most brokerage firms for a round turn. A Forex trader pays 3-5 PIPs on every transaction, in this case $20 per round turn transaction. Don't be fooled by talk that Forex brokers don't take commissions.
The major currency pairs being traded on the Futures Market are 6E (Euro), 6A (Australian Dollar), 6B (British Pound), 6C (Canadian Dollar), 6J (Japanese Yen). These are the same major currency pairs traded on the Forex. Before you decide to trade Forex currencies, check out Futures currencies.
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