It is a well-known fact that the forex market is the single largest traded market on a daily basis, with many traders amassing fortunes by trading successfully. It is a market made up of banks, commercial companies, central banks, as well as retail forex broker and investors. The current forex market is arguably the largest financial markets, far surpassing the futures and the equity markets combined.
Many traders have enquired about the advantages of forex trading as compared to futures trading. There are indeed many factors that make forex trading more preferable. Before we begin examining the advantages, we should first take a look at what the futures market actually is.
What is a Futures Market?
A futures market is a type of auction market. Here, participants buy and sell both commodity and futures contracts, which are to be delivered at a specified future date. They are exchange-traded derivatives contracts that will confirm the delivery of a commodity or security in the future, at a price set today. The New York Mercantile Exchange, the Chicago Mercantile Exchange, and the Minneapolis Grain Exchange are examples of futures markets.
Advantages of Forex Trading over Futures
- A 24 Hour Market: Many prefer the forex market because of its 24/7 nature. It provides more time for traders to look for trading opportunities and to capitalise on them. For instance, trading begins in Sydney when the market opens at 5:00 pm EST. The Tokyo market opens shortly at 7:00 pm EST, followed by the London market at 3:00 am EST. The New York market, on the other hand, operates from 8:00 am EST to 4:00 pm EST. The Sydney market opens again, before the New York trading session closes, making the forex market a 24-hour affair. Traders can thus react to both favourable or unfavourable news instantly by trading.
This is very different from the futures market, where traders have to wait until the next day’s opening to react to any important international news that occurs in the meantime.
- Price Certainty: Under normal market conditions, forex traders can get price certainty and rapid execution. This is a definite advantage over both the futures as well as the equities market, which do not offer either price certainty or instant trade execution. The futures market is still plagued by uncertainty regarding the prices for fills on market orders. A Common disadvantage is that the prices quoted by brokers in the futures market often represent the last trade instead of the price for which the contract will be filled.
- Minimal or No Commissions: With the advent and influx of electronic communications brokers into the market, traders are usually required to pay small amounts of commission to the broker. This is, however, significantly small compared to what is required to be paid in the futures market. Additionally, because of the presence of cut-throat competition among different forex brokers, traders usually get very low transaction costs and the best quotes.
- Degree of Liquidity: As mentioned before, the forex market is the largest traded market daily in the world, dwarfing that of any other market. Compared to an estimated daily volume of $5.3 trillion for the forex market, the futures market lags behind with a daily trading volume of approximately $30 billion. Thus, when it comes to liquidity, the futures market cannot compete with the forex market.
The forex market, on the other hand, is far more liquid. Here, positions can be liquidated with little or no slippage, unless there are extremely volatile market conditions present.
- Guaranteed Limited Risk: For the purpose of risk management, traders are required to have position limits, set relative to the money in a trader’s account. Risk is minimised to a large degree in the spot forex market because of the capabilities of various trading platforms. If the required margin amount exceeds the available trading capital in a trader’s account, trading platforms can automatically generate a margin call. All open positions are closed immediately during normal market conditions. Positions can also be closed beyond the trader’s stop loss level during very fast market conditions.
This is radically different in the futures market, where the trader’s position may be liquidated at a loss greater than the amount in the trader’s account. The trader is thus liable for any resulting deficit that might occur in his/her account.
Disadvantages of Futures Contracts
There are some additional disadvantages that the futures market possesses, which may be an issue for traders looking for success. Some of them are mentioned in brief below.
- Leverage issues: In the futures market, high leverage can result in rapid fluctuations when it comes to futures prices. The prices have a tendency to go up and down daily or even within a matter of minutes.
- Expiration Dates: Every futures contract has a certain expiration date. As the expiration date of a contract comes near, the contracted prices for the given assets can become less attractive for traders. It may so happen that a futures contract expires as a worthless investment.
- No Control Over Events in the Future: The fact that the trader does not have any control over future events in futures trading is considered as the single most common drawback of that market. The estimated demand-supply equilibrium in the futures market can easily be disrupted by natural disasters, political changes, and even unexpected weather conditions.
The futures and the forex market are different yet similar in many ways. However, the forex market has a lot of advantages such as its liquidity and accessibility, and the fact that it is a completely decentralised and deregulated market. Another huge factor is the influx of automated trading platforms and online forex brokerages, which have provided access to a greater number of small-scale traders, especially in the past decade.
On the other hand, the futures market is plagued with problems such as the risk of using leverage which can increase the potential loss. There is also no industry standard when it comes to fee structure and commission.