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Forex vs. Futures
New Page 7
Liquidity
The spot Forex market is a $1.4 trillion daily market, 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. If you compare
this to the $30 billion per day futures market it becomes clear that the futures
markets provide only limited liquidity. The market is always liquid, meaning
positions can be liquidated and stop orders executed without slippage.
24-Hour Market
The Forex market is a seamless 24-hour market. At 2 PM Sunday, New York time,
trading begins as markets open in Auckland, New Zealand, then Sydney and
Singapore. At 7 PM the Tokyo market opens, followed by London at 2 AM, and
finally New York at 8 AM. As a trader, this allows you to react to
favorable/unfavorable news by trading immediately. It also gives traders the
added flexibility of determining their trading day.
By comparison, the currency futures markets in the United States, such as the
Chicago Mercantile Exchange and Philadelphia Exchange, have regulated hours. The
CME, for instance, opens at 8:20 AM New York Time and closes at 2:00PM.
Therefore, if important data comes in from England or Japan while the U.S.
futures market is closed, the next days opening could be a wild ride.
Execution Quality and Speed
The futures market is known for inconsistent execution, both in terms of pricing
and execution time. Every futures trader has experienced a half hour wait for a
market order to be filled and has been executed at a price far away from where
the market was supposed to be trading. Even with electronic trading and limited
guarantees of execution speed, the price for fills on market orders is far from
certain. FXCM offers instantaneous execution and price certainty. On the FX
trading station, traders execute directly off real time streaming prices. There
is no discrepancy between the displayed price and the execution price. This
holds true even during volatile times and fast moving markets. In the futures
market, execution is uncertain because all orders must be done on the exchange.
This creates a situation where liquidity is limited by the number of
participants, which in turn limits quantities that can be traded at a given
price. Real time streaming prices ensure that market orders, stops, and limits
are executed without slippage and/or partial fills.
Commission Free Trading
In the futures market traders must pay a spread and a commission. All traded
financial products have a bid (buy) price, and an ask (sell) price, with the
difference defining the spread, or cost of execution. Up until recently, lack of
transparency in the futures market has disguised the spread. Now online trading
platforms, which show the depth of the market by including both the buy and sell
price, allow traders to see the real cost of the trade. Because the currency
market offers round-the-clock liquidity, traders receive tight, competitive
spreads both intra-day and night. Futures traders are more vulnerable to
liquidity risk and typically receive wider dealing spreads, especially during
after hours trading.
FXCM charges no commission or transactions fees to trade currencies online or
over the phone. The over-the counter structure of the currency market eliminates
exchange and clearing fees, which in turn lowers transaction costs. Costs are
further reduced by the efficiencies created by a purely electronic market place
that allows clients to deal directly with the market maker, eliminating both
ticket costs and middlemen. All clients have access to dealable bid/ask quotes.
In the futures market the prices represent the LAST trade, not necessarily the
price for which the contract will be filled. This lack of transparency hides the
true cost of the trade.
Reporting and Back Office Capabilities
In the spot Forex market, traders can see the value of their positions and
account equity move up and down with the market in real time. The key
information for every account is re-calculated and updated every time the
exchange rates change. Traders have immediate access to detailed information
regarding every open position, open order, and the generated P/L per trade.
Traders also have 24-hour access to full, real time snapshots of their account
statement since inception, or on a daily, weekly, monthly or yearly basis. As a
trader this means you never have to approximate your account equity or be
uncertain in regards to available margin.
Margin/Risk Management
For the purpose of risk management, traders must have position limits. This
number is set relative to the money in a traders account. Risk is minimized in
the Spot FX market because the online capabilities of the trading platform will
automatically generate a margin call if the required margin amount exceeds the
dollar value of the account as a result of trading losses. All open positions
will be closed immediately regardless of the size or the nature of positions
held within the account. If the futures market moves against you, your position
may be liquidated at a loss and you will be liable for any resulting deficit in
the account.
Futures Market: Making the Transition to the Forex Market
Regardless of which market you are trading be it the futures market , forex
market, or any of the countless others the attributes that determine the
viability of a market as an investment opportunity remain the same. Good
investment markets include: liquidity, market transparency, low transaction
costs and trending markets. All of these attributes describe the forex market
and it is exactly these characteristics that have compelled thousands of traders
to switch from trading the futures market to the forex market. The transition
from the futures market is easiest for the technical trader, but regardless of
whether you trade on technical or fundamentals, once you become familiar with
the basics of the forex market the transition should be quite simple.
For a smoother transition from the futures market to the forex market consider
taking the FX Power Course.
Click here for more information on the FX Power
Course or
click here to try a demo trading account
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