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Forex and Futures

  #3 (permalink)

Luxembourg, Luxembourg
 
Trading Experience: Advanced
Platform: TWS
Broker/Data: Interactive Brokers
Favorite Futures: Stocks
 
Posts: 491 since May 2012
Thanks: 1,641 given, 1,148 received



Jake G View Post
New guy question; hope it's not too naive.

I came across an interesting article, but I don't know what I'm talking about. Perhaps it's way off. In a nut shell they say forex is better than futures because its more liquid, can be traded all day, small commissions, less slippage, greater leverage, and reduced risk via automatic margin calls. Is there exaggeration here, and if so, how do you think such issues should be properly conceive of? Please and thank you. Would you say these points are represented accurately?

Here's the article:

"The forex market also boasts of a bunch of advantages over the futures market, similar to its advantages over stocks. But wait, there’s more… So much more!

Liquidity

In the forex market, $4 trillion is traded daily, 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. The futures market trades a puny $30 billion per day. Thirty billion? Peanuts!
The futures markets can’t compete with its relatively limited liquidity. The forex market is always liquid, meaning positions can be liquidated and stop orders executed with little or no slippage except in extremely volatile market conditions.

24-Hour Market

At 5:00 pm EST Sunday, trading begins as markets open in Sydney. At 7:00 pm EST the Tokyo market opens, followed by London at 3:00 am EST. And finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST. Before New York trading closes, the Sydney market is back open – it’s a 24-hour seamless market!

As a trader, this allows you to react to favorable or unfavorable news by trading immediately. If important data comes in from the United Kingdom or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride. (Overnight markets in futures currency contracts exist, but they are thinly traded, not very liquid, and are difficult for the average investor to access.)

Minimal or no commissions

With Electronic Communications Brokers becoming more popular and prevalent over the past couple of years, there is the chance that a broker may require you to pay commissions. But really, the commission fees are peanuts compared to what you pay in the futures market. The competition among brokers is so fierce that you will most likely get the best quotes and very low transaction costs.

Price Certainty

When trading forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution. Even with the advent of electronic trading and limited guarantees of execution speed, the prices for fills for futures and equities on market orders are far from certain. The prices quoted by brokers often represent the LAST trade, not necessarily the price for which the contract will be filled.

Guaranteed Limited Risk

Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account. Risk is minimized in the spot forex market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account.

During normal market conditions, all open positions will be closed immediately (during fast market conditions, your position could be closed beyond your stop loss level).
In the futures market, your position may be liquidated at a loss bigger than what you had in your account, and you will be liable for any resulting deficit in the account. That sucks."

Liquidity - won't really affect you. It means that the bid/ask spread can be smaller, but that is about it. Yes there may be slippage in futures, but there can also be slippage at forex. Especially at OANDA when they increase the spread around news events and the bid then falls outside of your stop (if you are long).

24hr market - not a real benefit. Most of the hours outside of trading hours tend to have very little activity or movement. You really want to trade fx around the London open, and perhaps the London close.

Reacting to news - OANDA increased their spread so much that it became impossible to trade around news. I would sometimes get stopped out of longer term positions just on the spread increases. Other brokers may be better for that, but you still sit with a lot of volatility around news events. Trying to trade those is not a good idea.

Minimal or no commissions - You pay a spread and yes, it can be lower than a futures trade with spread and commissions. In both cases you first need to beat the commissions, spread & slippage before you make money. You can neutralise the effect of that by trading less.

Price certainty - True to a degree, but not a problem for liquid futures / stocks. You can also use limit orders, but they may not always execute.

Guaranteed limited risk - Hhmm...wonder what all those EUR/CHF traders think of that one? Alpari is bankrupt and FXCM almost was. There is no such thing as "guaranteed limited risk". A lot of traders had their negative balances forgiven due to that event, but that it is usually not the norm. I suspect it was only done because of the difficulty foreseen in collecting this money from those traders.

Really, no market is better than any other. Your primary concern should be finding a market where you can control risk vs your account size. Due to the small lot sizes, forex ticks that box. However, I find that forex really does not have a lot of outsized moves when compared to stocks or futures. Yes, EURUSD made a spectacular move recently, but I found those to happen very infrequently.

Oh, and this email is a sales pitch or spam - stay away from whoever sent you this, especially if it comes from a broker. The forex brokers provide you with pricing, thus there is incentive for them to manipulate prices against its traders. However, I ran accounts at both OANDA and Dukascopy in order to check for this, and both of those were ok. Once when I got stopped out of a large trade (to the pip), I checked the price on Bloomberg and both of them offered a better price. However, there are a lot of dodgy brokers out there.

Edit: Just noted it is an article and not an email. Still be wary though if it comes from someone with something to gain.


Last edited by grausch; March 1st, 2015 at 10:37 AM. Reason: Need to post correction
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