It’s not just the stock market. The forex market also boasts of a bunch of advantages over the futures market, similar to its advantages over stocks.
When comparing forex versus futures, each has its unique characteristics, advantages, and disadvantages, so it’s important to understand the differences and benefits before deciding which market to engage in.
Liquidity
“Mr. Futures, our short shorts look cool!”
In the forex market, over $7 trillion is traded daily, making it the largest and most liquid market in the world.
This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market.
High liquidity ensures tighter spreads and better execution of trades
With futures, liquidity varies depending on the asset.
Some futures contracts, like those on major indices or commodities, are highly liquid, while others may have lower liquidity.
The futures markets can’t compete with its relatively limited liquidity.
Market Hours
Forex operates 24 hours a day, five days a week. This continuous operation is due to the global nature of currency trading, accommodating various time zones.
At 5:00 pm EST Sunday, trading begins as markets open in Sydney.
At 7:00 pm EST, the Tokyo market opens, followed by London at 3:00 am EST.
And finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST.
Before New York trading closes, the Sydney market is back open – it’s a 24-hour seamless market!As a trader, this allows you to react to favorable or unfavorable news by trading immediately.
If important data comes in from the United Kingdom or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride.
With futures, trades during specific hours depending on the asset and exchange.
Overnight markets in futures contracts do exist, and while liquidity is improving, they are still thinly traded relative to the spot forex market.
Leverage
Forex offers high leverage, sometimes up to 500:1 or more, allowing traders to control large positions with relatively small capital.
While this can amplify profits, it also increases the risk of significant losses.
Futures also provides leverage, but it’s typically lower than forex.
The margin requirements depend on the contract and the broker, but leverage in futures is usually around 20:1.
Minimal or no commissions
Most forex brokers don’t charge commissions, instead, they make money through the bid-ask spread.
Brokers add a markup to the spread, which can vary depending on market conditions and the broker’s policies.Also, forex traders don’t pay exchange fees, as trades are executed over-the-counter (OTC).
Futures brokers charge commissions on each trade, which can vary depending on the broker, contract size, and market.
Futures traders pay exchange fees, which are typically a small fraction of the contract value. And additional clearing fees may be charged by the futures exchange or broker.
Price Certainty
When trading forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution.
Even with the advent of electronic trading and limited guarantees of execution speed, the prices for fills for futures and equities on market orders are far from certain.The prices quoted by brokers often represent the LAST trade, not necessarily the price for which the contract will be filled.
Guaranteed Limited Risk
Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account.
Risk is minimized in the spot forex market because the online capabilities of the trading platform will automatically trigger a margin call if the required margin amount exceeds the available trading capital in your account.During normal market conditions, all open positions will be closed immediately (during fast market conditions, your position could be closed beyond your stop loss level).
In the futures market, your position may be liquidated at a loss bigger than what you had in your account, and you will be liable for any resulting deficit in the account. That sucks.
Regulation
Forex is decentralized and less regulated than futures.
The level of regulation varies by country, which can affect transparency and trader protection.
Futures is highly regulated with standardized contracts and centralized exchanges.
This regulation provides a high level of transparency and security for traders.
| Advantages | Forex | Futures |
|---|---|---|
| 24-Hour Trading | YES | No |
| Minimal or no commission | YES | No |
| Up to 500:1 Leverage | YES | No |
| Price Certainty | YES | No |
| Guaranteed Limited Risk | YES | No |
| Regulation | Some | YES |
Judging by the Forex vs. Futures Scorecard, Mr. Forex looks UNBEATABLE! Now meet the winners who trade the forex market.
