Forex vs Futures: Which Should You Trade?

The following article on Forex vs Futures is the opinion of Optimus Futures.

• Futures may offer more transparency as compared to forex.
• Forex, on the other hand, often comes with greater flexibility in lot sizes and a wider range of currencies.
• Before you trade either, it’s important to understand the key differences between centralized exchanges vs a “secondary” interbank markets.

If you’re interested in trading currencies, trading currency futures or spot forex are two popular ways to do it. But beyond the currency, the differences between these two financial instruments are significant. They can really change how you approach trading the asset.

We’ll be upfront: despite some positives of spot forex trading, we’re more into futures. Why? It’s all about accountability, access, and transparency.

Simply put, these three factors make regulated futures exchanges more reliable than trading a “proxy” for the interbank market. Let’s explore this.

Regulated Futures Exchange vs Interbank

When it comes to trading currency futures, you’ve got two main options: a regulated futures exchange or a liquidity provider accessing the interbank market.

What is a Futures Exchange?

A futures exchange (like the CME) is a centralized place where currency contracts are bought and sold. Regulated by the US Commodities Futures and Trading Commission (CFTC), an exchange ensures fairness, transparency, and reliability for traders.

What is the Interbank Market?

On the flip side, the interbank market is where banks trade currencies directly with each other.

The key phrase here is “banks trade with each other.” Since you don’t work for a bank, neither you nor most retail traders can’t join this party directly. You need a liquidity provider to access it for them.

And this is where transparency, pricing, and accountability between the two marketplaces diverge.

Price Transparency in Forex May Be an Issue

When it comes to prices and price transparency, futures exchanges and liquidity providers offer very different experiences.

On a regulated futures exchange, prices are the same for everyone. This means that whether you’re a big institution or a small retail trader, you’ll see the same prices, ensuring a fair trading environment.

In contrast, trading with a liquidity provider means dealing with varying spreads and prices. This is because liquidity providers derive their prices from hundreds of interbank bids and offers. As a result, currencies can have different spreads and prices depending on the provider and market conditions. This lack of uniform pricing can make it harder for retail traders to know if they’re getting a fair deal.

Forex Advantage is in Lot Size, Range of Currencies, No Expirations

Futures contracts come in set sizes, with micro contracts being the smallest at 10,000 currency units. This can be a bit limiting for those wanting to start even smaller. On the other hand, forex offers more flexibility.

They let you trade as little as “nano-lots” worth just 100 currency units, making it easier for beginners or those with limited capital to trade the currency markets. Lot size flexibility also allows you to fine-tune your position size to match your ideal position.

READ | How Micro Futures Changed the Game for Retail Traders

Plus, forex providers usually have a much wider range of currencies to trade than what you’ll find on a regulated US futures exchange. More options mean more opportunities to diversify your markets and strategies.

Another thing to consider is contract expirations. Futures contracts have set expiration dates. You’ve got to roll them over yourself. In contrast, forex currencies are rolled over automatically, so you can keep your trades open as long as you like without worrying about expirations. This automated rollover feature makes forex trading more convenient for many traders.

The Big Elephant in the Room: Is My Broker Trading Against My Position?

When you go long a currency, say a euro futures contract, you are…

1) trading directly with another market participant,

2) through an exchange, and

3) whose trades are recorded and transparent across the entire market.

When trading forex, your position is being…

1) supplied by a liquidity provider who

2) offers their own unique bids and asks derived from hundreds of decentralized interbank spreads and

3) whose trades, as a result, may differ from all other liquidity providers.

In forex, it’s not your broker who’s taking the opposite side of your trade; it’s the liquidity provider. They do this to hedge against your position or sell you lots they already have. These liquidity providers are market makers, making money from the spread, not from betting on market directions.

Trading Costs in Futures vs Forex

Both asset classes offer high leverage*. But their cost structure has a few major differences.

• Futures trading often involves predictable costs such as fixed broker commissions, exchange fees, and clearing fees. This cost structure, transparent and standardized, makes it easier for you to plan and manage their expenses.

• Forex trading costs are less predictable due to variable spreads that depend on market conditions and currency pairs. There are also swap fees for positions held overnight, adding to ongoing costs.

It’s important to understand how these differences between both assets might impact your trading strategies and risk tolerance.

Unique Advantages of Trading Futures (and FX Futures) Over Forex

As we said at the top of this article, we’re leaning more toward futures than forex. We believe that trading futures, including FX futures, offers distinct benefits over spot forex:

Standardized Contracts & Centralized Clearing: Futures contracts are standardized, meaning the terms are the same for everyone, and are cleared centrally, reducing the risk of default and ensuring a smooth transaction process.

Potentially Lower Transaction Costs: Futures often have lower and more predictable transaction costs, with fixed broker commissions and exchange fees, making it easier to manage your trading expenses.

Greater Transparency in Pricing: This is a big one. On a regulated futures exchange, prices are visible and the same for all traders, fostering a more transparent and fair trading environment.

Reduced Counterparty Risk: With futures, your trades are with the exchange, not an individual broker or liquidity provider, significantly lowering counterparty risk. The odds of a forex liquidity provider going insolvent, however remote, are far greater than those of a US futures exchange.

More Stable Liquidity: Futures markets tend to offer more stable and reliable liquidity, reducing the chances of extreme price fluctuations and ensuring smoother trade execution.

For many traders, these factors make futures a more favorable if not compelling choice for market speculation.

Comparison in a Nutshell

Comparison Criteria	Futures	Forex
What are you buying?	Contracts for future delivery of assets	Currency pairs
How long can you hold it?	Until contract expiration	Indefinitely (with rollover)
What can you trade?	Commodities, indexes, currencies, etc.	Currency pairs only
Leverage*	Varies, typically 10:1 to 30:1	High, often up to 50:1 or 100:1 or more
Risks	Market volatility, margin calls	Market volatility, margin calls, currency fluctuations, and counterparty risk
Who are you trading with?	Market participants via a centralized exchange	Liquidity providers (e.g. market makers)
Regulation	Regulated by CFTC in the US	Less regulated, varies by country
Price Transparency	Very high	Price varies according to the liquidity provider
Counterparty risk	Very low	Higher for Forex

The Bottom Line

These are just a few of the major differences between trading futures and forex, but the ones emphasized above are critical “structural” aspects that every trader should be aware of. The differences in costs, access, transparency, and structure are key to deciding whether forex vs futures is right for you.

Many traders feel that “trust” is a big issue in trading. And the more transparency there is the greater the trust. This is why we tend to lean toward the regulated and centralized world of futures. Ultimately, it’s up to you to decide what best matches your trading goals and risk tolerance.

GET STARTED WITH FUTURES TRADING

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The initial margin required is small compared to the futures contract’s value, making transactions ‘leveraged’ or ‘geared.’ A modest market movement will have a larger proportional impact on the funds you’ve deposited or will need to deposit; this can work for and against you. High leverage may result in deficits.