Forex vs. Futures

Forex trading involves the buying and selling of different currencies on the foreign exchange market. It is decentralized and operates 24 hours a day, 5 days a week, allowing for continuous trading. Forex trading is typically done in pairs, such as USD/EUR or GBP/JPY, and its primary focus is on the fluctuations in exchange rates between different currencies.

Futures trading, on the other hand, involves buying or selling contracts that specify the future delivery of a commodity or financial instrument at a predetermined price. These contracts are traded on exchanges and are standardized in terms of quantity, quality, and delivery date. Futures trading allows traders to speculate on the future price movements of the underlying asset without actually owning it.

The main difference between forex and futures trading lies in the assets being traded (currencies vs. contracts for commodities or financial instruments) and the market structure (decentralized vs. exchange-traded).

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What is Forex Trading?

The spot forex market is the decentralized physical or cash market for currencies. It operates via a global and largely unregulated network of financial institutions and online brokers. The forex market’s decentralized nature means that transactions do not occur on a single transparent exchange like stock transactions generally do.

A foreign exchange or forex transaction involves the exchange of one currency for another. Such transactions take place in the forex market, which has the distinction of being the largest and most liquid financial market in the world. To get a sense of its size, the forex market had a daily turnover of $6.6 trillion in April 2019, according to the Bank for International Settlements (BIS). 

Currencies trade in the forex market in pairs. Rather than a price, the quoted quantity in the forex market is the rate of exchange or “exchange rate” between two currencies since one currency is exchanged for another whenever a forex transaction takes place. 

The first currency in a forex quote is the base currency or the currency to be bought or sold. The second currency, known as the quote or counter currency, is the currency that is used to buy or sell the base currency. When taking a forex position, you’ll always be long one currency and short another. 

The most liquid currency pairs are known as the “majors” and generally include the U.S. dollar. The majors account for over 75% of the forex market transaction volume. The seven major forex currency pairs are: 

• EUR/USD: the European Union’s euro vs. the U.S. dollar
• GBP/USD: the British pound sterling vs. the U.S. dollar
• USD/JPY: the U.S. dollar vs. the Japanese yen 
• USD/CHF: the U.S. dollar vs. the Swiss franc
• AUD/USD: the Australian dollar vs. the U.S. dollar
• USD/CAD: the U.S. dollar vs. the Canadian dollar
• NZD/USD: the New Zealand dollar vs. the U.S. dollar

Currency pairs that do not include the U.S. dollar as one of the currencies are known collectively as “crosses.” Other currency pairs with less liquidity include the minor and exotic pairs such as the U.S. dollar vs. the Mexican peso (USD/MXN). 

When trading in the spot forex market, currencies are physically exchanged on the settlement or value date. A spot forex transaction typically settles within two business days to allow time for bank transfers to take place. 

To start trading in the forex market requires little effort and no money if you just want to learn how to trade currencies. Basically, you can open a demo account with almost any online retail forex broker with no obligation and no funds so that you can practice trading forex until you develop a viable trading plan. 

If you’ve traded financial markets before and want to fund a live forex trading account so you can get started right away, then some online forex brokers will let you open a live account with as little as $1. Since $1 worth of margin won’t secure you much of a trading position, you might want to deposit at least $100 initially to see if trading spot forex suits you.

How to Trade Forex

• Open an account to trade FX or CFDs.
• Pick which currency pairs you want to trade.
• Choose how you want to execute the FX pair (spot, forwards or options).
• Place your trade.

Pros and Cons of Trading FX

Forex trading has some notable advantages over other financial markets, as well as some disadvantages. 

Pros

• Deep liquidity: No regulated exchange or trading venue compares with the massive size and liquidity of the global forex market, which makes it capable of absorbing very large transactions without significantly moving the market. 
• High leverage: In the U.S., you can leverage up to 50:1 on major currency pairs and 20:1 on minor pairs, which is considerably higher than in any other market. In some unregulated jurisdictions, leverage ratios for forex trading can be as higher as 3,000:1.  
• Very accessible market: Just about anyone with a small margin deposit and an internet-connected smart device can trade forex currency pairs online.
• Commission-free trading: Online forex brokers usually offer a commission-free trading account to retail traders. The broker instead makes its money by widening its dealing spreads compared to those quoted in the highly-competitive Interbank forex market. 
• Islamic accounts available:  Many online forex brokers cater to Muslim clients by offering a special Islamic trading account that does not pay or receive interest.

Cons

• Largely unregulated financial market: Operating in the unregulated and decentralized forex market can potentially expose you to scams, so be sure to select a reputable and well-regulated online forex broker. 
• Lack of quote consistency: Since no centralized currency exchange exists, the exchange rates quoted for a currency pair can vary among online brokers and other market-makers. 
• Sudden and sharp exchange rate movements: The currency market can show substantial volatility at times, so keep that firmly in mind before taking a forex position to avoid unanticipated losses. For example, certain geopolitical events and economic data releases can result in rapid exchange rate movements as new information reaches market makers. 

What is Futures Trading?

Futures are derivative contracts used for the exchange of physical assets, as well as for hedging and speculation. A futures contract is an agreement to buy or sell an asset at a future date, which is a currency pair in the case of currency futures. A currency futures contract specifies the exchange rate at which the underlying currency pair is to be exchanged among the counterparties, the date and exact time of its expiration and the quantity of the base currency to be exchanged for counter currency under the contract. 

Unlike options, where traders can exercise and take delivery of an asset, futures delivery is the responsibility of the seller of the contract. This is the main reason why the vast majority of futures contracts are never delivered upon but are instead offset by the seller buying back the futures contract they sold for the cash gain or loss.

Currency futures trading on the CME involves dealing multiples of specific contract lot sizes (standard, e-mini and e-micro) expressed in foreign currency on exchange rates that are typically quoted in U.S. dollars per foreign currency unit for pairs that include the U.S. dollar. This quoting method is the mathematical inverse of the quoting convention in the OTC forex market for pairs like USD/JPY, USD/CAD and USD/CHF where the U.S. dollar is the base currency.

Many corporations will establish forex and futures positions to offset the exchange rate risk from doing business abroad. International investors might also use futures to hedge their currency risk.

For example, if a U.S.-based investor has stock holdings in the U.K., then these holdings would be sensitive to the level of the GBP/USD exchange rate. The forex risk of both the GBP principal amount and the dividend income of the stock could be offset by selling a GBP/USD futures contract in that amount for the expected investment horizon.

If the value of the investor’s stock returns and dividends decreases because of a fall in the value of the GBP against the USD, then that loss could be recouped from gains made on the short GBP futures contract that was used as a hedge.  

Currency futures contracts trade primarily on the Chicago Mercantile Exchange (CME) and have standardized amounts for each currency. Transactions are settled in U.S. dollars, and the dollar value for each tick is between $6.25 and $10 depending on the currency. You can see the different contract sizes, symbols, expirations, tick values and minimum tick sizes for the CME forex futures contracts in the table below. 

Trading hours for CME forex futures contracts are from Friday 5.00 p.m. until 4:00 p.m. Central Time (CT) with a one-hour break each weekday beginning at 4:00 p.m. CT.

To trade futures contracts, you must deposit a minimum amount of money, known as initial margin, that is set by CME Clearing to secure the broker you use and the exchange against any potential losses you might experience. You also need to remain aware of your maintenance margin amount, which is the sum that must be maintained in your account as long as you have an open position. 

For example, CME Clearing might determine that the initial margin for your currency futures position upon its initiation is $10,000 and the maintenance margin is $7,000. If the value of your account later falls to $5,000 ($2,000 below the maintenance margin requirement), then you would likely get a margin call.

The person making the margin call would ask you to either deposit enough funds into your account to restore the initial margin amount of $10,000 if you wish to continue to hold the entire position or to reduce the losing position to an amount suitable for the margin you can afford to deposit. If you fail to do either of those things, then you will face the entire position’s automatic liquidation at a loss. 

How to Trade Futures

• Open a futures or CFD trading account.
• Pick the futures market you want to trade.
• Decide whether to go long or short.
• Set up your stops and limits.
• Place your trade.
• Monitor your position.

Pros and Cons of Trading Futures

Trading currency futures has several advantages and disadvantages relative to trading spot forex. The best option for you will depend on which venue suits your currency trading needs and preferences best.  

Pros

• Fully regulated: The CME and International Commodities Exchange (ICE) where currency futures trade in the U.S. are fully regulated by the U.S. Commodities Futures Trading Commission (CFTC) and the National Futures Association (NFA).  
• Safety and security: CME trades go through Clearing, which backs all trades. This practice helps mitigate your counterparty risk and allows you to trade futures more confidently.  
• Transparency: See the same exchange rate quotes and trades as other participants in the currency futures marketplace. 
• Significant liquidity: The currency futures market is quite liquid since futures derive their quotes from exchange rates quoted in the huge over-the-counter forex market.
• Options availability: Each currency futures contract will typically have a corresponding series of option contracts traded on the same exchange. 
• CME FX Link: The CME’s FX Link transparently provides a central limit order book on the CME’s electronic Globex platform so you can trade spreads between the OTC FX Spot and CME FX futures markets seamlessly. Available spreads currently include OTC spot and the front two serial and quarterly expiries in EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY, USD/CAD, USD/CHF and USD/MXN.

Cons

• Higher capital requirements: Trading currency futures can be considerably more capital-intensive than trading micro or nano lots on the spot market via an online forex broker. Also, to leverage futures positions, you have to trade in a margin account and could incur a margin call if your position goes against you. Failure to deposit sufficient funds after a margin call could result in the liquidation of your losing position.       
• Lower leverage: The maximum leverage for currency futures is 30:1 for major currencies and 20:1 for exotic currencies. This level is lower than the 50:1 leverage you can use to trade spot forex via online forex brokers. 
• Per-contract commissions: Trading in a futures margin account requires you to pay a commission for each contract bought and sold. This requirement could increase your trading costs, especially if you prefer to use short-term trading strategies like scalping. 
• Exchange fees: Since currency futures trade on the CME, per-contract exchange fees are charged that depend on the contract size, exchange membership status and whether the contract was traded via open auction or electronically.
• Position sizing challenge: You can only trade currency futures in multiples of the standard, e-mini or e-micro futures contract amounts or lot sizes. This means you can’t use fractional amounts of a lot to scale in or out of a position or to size an initial position more appropriately based on the capital in your trading account, for example. 
• Sudden and sharp exchange rate movements: The currency futures market shows substantial volatility at times just like the underlying spot forex market

Forex vs. Futures What’s the Difference?

When considering whether to trade futures vs. forex as a retail trader, a substantial consideration will be the amount of risk capital you have available to deposit into a margin account. If you have a few thousand dollars or less, then you’ll probably want to open an account with an online foreign exchange broker to trade currencies. If you have closer to $100,000 to trade with, then futures becomes a more viable option.

Another key consideration that can help you decide between the currency futures and spot forex market is the minimum position size you intend to trade and how small an amount you will need to adjust your trading positions by. Futures tend to have a larger lot size than spot trades made via online forex brokers, so your minimum transaction size will be higher. 

A further difference between the futures and forex markets is the daily turnover they each see. The futures market only has a relatively small daily turnover of $100 billion compared to the huge $6.6 trillion turnover seen in the spot forex market. Despite its relatively low turnover, the futures market currently has a substantial open interest of 3 million outstanding contracts that are collectively worth over $300 billion.

Most retail traders will opt to use an online forex broker to trade forex, but if you plan on trading currency options as part of your strategy, then you might prefer to use futures. Futures generally have a highly liquid option series that matches the futures delivery date exactly and trades on the same exchange. Very few brokers presently offer currency options to retail traders, although those who can trade in the Interbank market can contact major banks for an OTC currency option quote. 

Compare Brokers Offering Futures and Forex

If you’re a retail trader and would like to get started trading forex or futures, Benzinga has taken much of the guesswork out of selecting a reputable broker to trade through by compiling the comparison table below. 

Frequently Asked Questions