What is Forex Trading?
Foreign exchange refers to the exchange of currencies for reasons such as trade or business. The forex market is the largest financial market in the world, and its large trading volume allows speculators and retail traders to take advantage of trading opportunities daily.
There are various ways of executing forex trades such as spot trading on brokerage platforms. In foreign exchange trading, the currencies are traded in pairs, and you have to buy one currency and sell the other simultaneously. This means you have to analyze the charts and form a bias about the movement of price in the future.
FX trading allows retail traders to profit from the currency markets by taking short-term or long-term trades once they’ve established the most likely market direction. The currency prices move due to exchange rate fluctuations and changes in supply and demand. If you believe that a currency’s value will increase, you can buy that currency and sell a weaker currency simultaneously.
What is Futures Trading?
The futures market allows investors and traders to buy and sell futures contracts that are delivered on a specified date in the future. Futures contracts typically are traded on organized exchanges that set standardized terms for the contract. The presence of exchanges increases liquidity since more people can now trade standardized contracts. As the name suggests, these contracts are fulfilled at a set date in the future.
Popular futures exchanges are;
- The New York Mercantile Exchange (NYMEX)
- The Chicago Mercantile Exchange (CME)
- The Chicago Board of Trade (CBoT)
- The Cboe Options Exchange (Cboe)
- The Minneapolis Grain Exchange.
These exchanges allow traders to purchase contracts relating to different assets, including commodities and forex. Therefore, futures trading is a system of trading and not an asset class. This means you can also trade currencies through futures contracts, but the terms are different from regular spot trading conditions.
3 Differences Between Forex and Futures
1 Time of Exchange
In the futures market, the currency pair is exchanged on the delivery date, which is usually in the distant future.
In the spot forex markets, currency exchange occurs at the point of executing the trade.
2 Expiration Date
Futures contracts have expiration dates. This means for you to hold on to your contracts, you have to roll them over to the next month.
Spot forex trades have no expiration dates, and you can hold your position for as long as your margin will allow.
3 Trading Fees
While trading futures, there are no spreads, but you will be required to pay a commission for your trade. The commissions you pay can vary based on the futures brokerage house. But no matter what commissions you pay, the fees are significantly lower than trading the spot forex markets.
Forex spot trading charges both spreads and commissions. Spread is the difference between the bid and ask price of a currency pair.
Similarity Between Forex and Futures
The main similarity between forex and futures is when the trading price is determined. In both markets, the price at which currencies are exchanged is determined at the point of exchange.
Forex Vs. Futures: How to Trade
How to Trade Forex
Forex trading can be done on most regulated brokers, and here are 5 steps to get you started;
- Open a Trading Account: To trade forex, you need to open a brokerage account. You can use a live or demo account, depending on your level of expertise.
- Choose an Asset: While choosing a currency to trade, make sure that you learn about the factors that affect its supply and demand.
- Carry Out Analysis: You can buy or sell based on the results of your analysis and research.
- Manage Your Risk: While trading any pair, you need to manage your risk and use proper risk management strategies.
How to Trade Futures
If you want to trade futures contracts, here are 5 steps to get you started;
- Open a CFD trading account on a regulated exchange platform.
- Pick a futures market to trade: You can trade a variety of currencies and commodities through futures contracts.
- Decide whether to go long or short
- Set your trade management parameters.
- Place your trade
- Monitor your position
Quelle / Foto: Redaktion, Editor