Foreign Currency Futures

Why Trade Forex: Forex vs. Futures

Stocks vs Options vs Futures vs Forex.

Forex investors may engage in trading currency futures, as well as trade in the spot forex market. The difference between these two investment options is subtle, but worth noting. So let’s discover more about stocks vs forex vs futures vs options. More markets are available for trading today than ever in the history of the world. The markets aren’t just available, but public access to them is easier than ever before.

24-Hour Market

Another interesting difference in spot forex vs. futures forex trading is the cost (or margin) that it takes to place an actual trade. When trading the GBPUSD, for example, your broker will probably require you to have 2% of the trade value in your account to place the trade.

The contract seller has the reverse obligation. The obligation comes due on the futures expiration date, and the ratio of bought and sold currencies is agreed to in advance. The profit or loss arises from the difference between the agreed price and the actual price on the expiration date. Margin is always deposited for futures trades — it is cash that acts as a performance bond to ensure both parties fulfill their obligations. The buyer of a currency pair call option may decide to execute or to sell the option on or before the expiration date.

The option has a strike price that denotes a particular exchange ratio for the pair. If the actual price of the currency pair exceeds the strike price, the call holder can sell the option for a profit, or execute the option to buy the base and sell the quote on profitable terms.

A put buyer is betting on the quote currency appreciating against the base currency. Instead of having an option to buy and sell currency pairs, an option on a currency future gives holders the right, but not obligation, to buy a futures contract on the currency pair. The strategy at play here is that the option buyer can benefit from the futures market without putting down any margin. Should the futures contract appreciate, the call holder can simply sell the call for a profit and need not purchase the underlying futures contract.

A put buyer profits if the futures contract loses value. Even with pre and post market trading, the stock market is open less than 12 hours per day, and the liquidity during these sessions are not always good.

There is no trading pit for the ES which means there are no market makers, no locals and no floor brokers and all orders are matched by a computer on a first come-first served basis no matter how large or small they are.

While most Forex firms offer electronic trading, some manually approve each order at a trading desk because they are market makers against your orders. US regulated Forex firms are not allowed to offer more than This high margin requirement may be very limiting to daytraders who are only looking for small market movements. For futures trading the daytrade and position margins do not require you to pay any interest on the remainder of the funds.

No special type of futures trading account is required to be able to take advantage of the daytrade margins. Forex has a cost of carry associated with its trading which means interest may be charged or paid on positions taken, but in the end this interest is seen as a revenue stream for Forex brokers and works to their advantage.

Of course only risk capital should be used no matter what the amount is that you choose to start with. The SEC describes a stock trader who executes 4 or more daytrades in 5 business days, provided the number of daytrades are more than six percent of the customer's total trading activity for that same five-day period, as a Pattern Daytrader.

Not all stocks and Forex markets are as liquid which means movements can be shaky and erratic, making daytrading more difficult. Forex firms like to make the claim that the over the counter foreign exchange market trades more than one trillion Dollars in volume per day, but most people don't realize is that in most cases you just traded against your broker's dealing desk rather than the true interbank market.

Should a report or rumor come out on an individual stock it should have very little impact on the whole index you are trading. When you take a position in an individual stock you are susceptible to stock specific risk which can occur without warning and with violent consequences. Even with regulated US Forex firms, funds are not considered segregated, so if a regulated firm goes bankrupt clients funds are not offered the same protections as they are in the futures market.

Many ES futures traders only track the ES market and find it is the only chart they need to follow. There are always opportunities and great volume throughout the trading day. When large institutions or traders want to take a position in the market or hedge a portfolio they usually turn to the futures markets to get this done quickly and efficiently. Therefore, why not trade the market the "Big Boys" trade? Most traders agree that individual stocks and therefore, the market as a whole follow the futures indices, and not the opposite.

In fact, many stock traders will have an Emini futures chart up next to the stock they are following. As a stock or Forex trader you may need to scan dozens of stocks or currency pairs for opportunities.

Many times specific stocks fall out of favor so volume and, therefore opportunities dry up and traders are forced to find a new stock to trade. There are no rules against going short the ES, traders simply sell short the ES contract in hopes of buying it back later at a lower price.

Automated Strategies Staged Order Strategy. An options contract is an agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell a particular asset at a later date at an agreed upon price. A futures contract is an agreement traded on an organized exchange to buy or sell assets, especially commodities or shares, at a fixed price but to be delivered and paid for later. Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world's currencies trade.

Instead you pay the "spread". The spread is the price difference between where a trader may purchase or sell the underlying asset. The SEC has jurisdiction over stocks and all publicly-traded companie. Stock brokers and investment firms are regulated by the Financial Industry Regulatory Authority.

The United States has two major government bodies regulating the financial markets: Both organizations have a similar goal—to prevent fraud and other malpractice in the financial markets and to safeguard investor interests.

The foreign exchange market is by far the largest, most liquid market in the world. Options can be thinly traded, thus have low liquidity. Some, like ES, are heavily traded, and have good liquidity. Others are very thinly traded, so have low liquidity. Taxes You pay long term held over a year or short term holding ordinary income taxes. Can be quite complex. The tax treatment is tied to the tax treatment for the option's underlying financial instrument.

Taxed as ordinary income. Dividends If you purchase a stock sufficiently long before it distributes dividends, you receive them. No No No Ease of taking a short trade Varies, but generally not as easy as going long. Buy a put option. Easy Easy Leverage Leverage involves borrowing a certain amount of the money needed usually from your broker to invest in something. Regulated Why does it matter if a trading instrument is regulated?

Taxes Oh boy, taxes!

Options on Currency Pairs

In addition, active traders may be eligible to choose the mark-to-market MTM status for IRS purposes, which allows deductions for trading-related expenses, such as platform fees or education. The instrument s a trader or investor selects should be based on which is the best fit of strategies, goals and risk tolerance.

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Now it's time to do my research and pic my broker, paper trade to see if my futures techniques will work in the FOREX. But access to all of the currency pairs will be limited.

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