FOREX versus Futures

The futures contract is precisely that -- a legally binding agreement to deliver or accept delivery of a specified grade and quantity of a given commodity in a distant month. FOREX, however, is a spot (cash) market in which trades rarely exceed two days. Many FOREX brokers allow their investors to roll over open trades after two days. There are FOREX futures or forward contracts, but almost all activity is in the spot market, facilitated by rollovers.

In addition to the advantages listed, FOREX trades are almost always executed at the time and price asked by the speculator.
There are numerous horror stories about futures traders being locked in to an open position even after placing the liquidation order. The high liquidity of the foreign exchange market (roughly three times the trading volume of all the futures markets combined) ensures the prompt execution of all orders (entry, exit, limit, etc.) at the desired price and time.

The caveat here is something called a requote, or dealer intervention, which I discuss in a Games Brokers Play.

The Commodity Futures Trading Commission (CFTC) authorizes futures exchanges to place daily limits on contracts that significantly hamper the ability to enter and exit the market at a selected price and time. No such limits exist in the FOREX market. When a surprise news announcement hits the currency markets, appropriate pairs will move as far as they need to reestablish a buyer-seller equilibrium.

Stock and futures traders are used to thinking in terms of the U.S. Dollar versus something else, such as the price of a stock or the price of wheat. This is like comparing apples to oranges. In currency trading, however, it is always a comparison of one currency to another currency -- Granny Smith apples to someone's McIntosh apples, if you will. This paradigm shift can take a little getting used to, but I provide multiple examples to help smooth the transition.

The author was a commodity futures trader and registered trading advisor for many years, but has found currency trading much more to his liking for many of the reasons already discussed.

I must reiterate: There is always some risk in speculation regardless of which financial instruments are traded and where they are traded, regulated or unregulated. Leverage is a door that swings both ways.

Both stock and futures traders must make a similar adjustment to currency trading: in stocks and futures, the specific investment vehicle is denominated in dollars or local currency. In FOREX, the underlying vehicle is a pair -- the relative value of one currency to another.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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