The difference is that forex trading involves buying and selling currency, while futures trading is a way to trade thousands of financial markets, such as forex, indices, shares, commodities and more.
What is forex trading?
Forex trading – also called FX or currency trading – is the process of converting one currency, such as USD, into another, such as EUR.
This is the mechanism that underpins the global trade in goods and services. Banks, companies and individuals trade around $6.6 trillion in foreign exchange transactions every day. That equates to more than 2.3x the entire annual GDP of the UK.
What is futures trading?
Futures trading is an agreement between two parties, a buyer and a seller, to exchange the underlying market for a fixed price at a future date. The buyer is obligated to buy the underlying market and the seller has to sell at or before the expiry of the agreement.
Futures are often used to hedge against expected exchange rate changes. For example, a trader might buy a certain number of EUR/USD forward contracts to lock in an exchange rate. That person will then be obligated to buy those USD when the contract expires – hopefully when the USD’s value has risen, but even if it has dropped.
Liquidity
In the forex market, $6.6 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.
24-Hour Market
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.
Minimal or no commissions
With Electronic Communications Brokers becoming more popular and prevalent over the past couple of years, there is the chance that a broker may require you to pay commissions.\
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.
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 generate a margin call if the required margin amount exceeds the available trading capital in your account.
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