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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."
Can you help answer these questions from other members on NexusFi?
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.
I agree with most of the things grausch is pointing out.
But.....I have found the service I get from Fxcm most acceptable. Very little slippage.
Of course spreads will increase during news, that is the very same with spot forex too.
Spreads has not been a problem for me, but I'm not a scalper...more kind of a daytrader.
The good thing with retail forex is that you get free demo trading for as long you want .
...and it's cheap. You don't need to have even close to the capital that you need for trading futures.
It's a great place to start as a beginner.
I only wish I had started with forex instead of stocks.
My 2 cents about retail forex.
I agree with sharpshoota and grausch. I do think that the "article" seems to be a sales pitch and is a bit aloof.
Now I have not traded FOREX so correct me if I am wrong. I have noticed that many FOREX brokers advertise "free commissions" like it is some benefit over futures. But you have to pay the spread between the bid/ask even on a limit. That seems to me like robbing Paul to pay Ringo. You are still paying to make the trade. The fact that many borkers advertise commision free trading is kind of shady since one is actually paying the spread. Call it what it is. a fee to place the trade. I am not sure if you have to pay the spread to exit the trade.....? THrow in the added spread during volatile market conditions and one FOREX trade could get expensive. Perhaps i am not understanding the pay the spread concept but a futures commision with most brokers that i have talked to cost the trader under 5 dollars round turn per contract. (there is the possibility of slippage in a fast moving market with a market order) Not sure if the "pay the spread" in FOREX trading is per contract or per trade regardless of contract total.......??
Some Pros to FOREX:
Lot size options offering the trader ability to limit exposure by not overleveraging with a smaller account. Even with a larger account it seems like a novice trader could benefit from the reps while forming a trading strategy in real time market and emotional fluctuations with mini or micro lots.
As for the cons, No central, regulated exchange, hence all of the overinflated sales pitches amongst other pitfalls. THis makes it very important to find a reputable broker.
Also, No VOlume data. Some trading methods rely on volume data and FOREX does not offer this.
THis statement seems likea blatant fallacy. If my debate class memory serves me correctly, this statement is ad hominem.
I would think that any market could wipe out an over leveraged account during a volatile move against ones posistion. IF you have a market stop then it could get filled with major slippage and a limit stop could get jumped...... In any market..... and a negative balance could ensue.....in any market.
The liquidity claims FOREX brokers advertise seem ridiculous to me. Certainly there are futures markets that lack liquidity but there are also FOREX pairs that lack liquidity. Likewise there are futures markets with ample liquidity for small and big lot traders as there are in FOREX pairs.
I am not trashing FOREX, personally the smaller lot size appeals to me, I am just saying that some of the claims that FOREX brokers make seem a bit ridiculous.
"Napoleans severest comment on his beaten enemies - that they "saw to many things at once""- Hart
I think the first question to ask is what type of size you are putting on and how much capital you have in your trading account.
For example, if we're talking about a $1,000 USD trading account, then you're probably stuck trading micros with a retail broker as your only option.
If we're talking about a $10,000 account and you're only trading one contract at a time, I don't think you're ever going to have any liquidity issues or spread issues beyond one tick except for maybe the New Zealand dollar futures before any of the major markets are open. At 1-3 contracts, futures are generally going to be superior due to spread and execution issues versus retail platforms. Even during sterling or euro news release, you should have plenty of liquidity to trade 1-3 futures contracts.
I've had stops that were hit 2 pips away from where price actually hit on the spot market because a retail broker widened out the spread to grab my order while the futures position was just fine because there are no spread widening issues there.
If we're talking about a $100M USD account, then those traders are probably trading in the spot market, crosses, futures, spot options,and futures options to find enough liquidity at the best prices.
When I was trading Forex at Mb Trading, I was renting a server which cost $75 a month. I was using NinjaTrader and programming in C# sharp, Microsoft C. The problem was Mb Trading would not take my strategy, so I ended up trading naked without indicators and no EA. I was playing chicken with the Japan Central Bank as to when they were going to
manipulate their currency. I made some money, but later it necktied me. Now, I'm giving TradeStation a try with Easy Language. I figure they are more fair and maybe I'll come up with an EA that will make some money. I'm starting with a 2K account and we'll go from there. Has anyone had success with TradeStation Forex? Is the same thing going to happen that happened to me at MB Trading, e.g., my EA not approved? How do I get an EA approved? Anyway, I've traded commodities, e.g., CL, NG, on TradeStation. I like the platform. When you submit an order in Forex, the price is 2 or 3 points higher than the market. Like you say that's paid to the broker, like a commission only they call themselves commission free - A play on words. You have to make up for that extra in your getting in at the right time. Anyway, I'm a returning member. Glad to be back.
I agree with what you said, but this is not only a liquidity issue.
Gaps could occur in both liquid and illiquid markets, and as such, to guarantee limited risk is deceiving and not true in both liquid and illiquid markets.
For many years, I saw this statement of limited risk on FX on many FX broker sites, and was always puzzled how could such thing could be claimed.
To be honest, at times, I have thought that they have a better system to monitor risk, but they do not.
The Swiss Frank sharp rise due to SNB announcement, has sent many FX shops bankrupt or near bankruptcy.
This illustrates that no risk is limited.
This is what you should keep in mind when it comes to stops in any asset classes: The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders
Something rather off topic slightly, but I see that many in FX cash I consider potentially legitimate operations, charge commissions as oppose to spreads. This bares the question of why so do and some do not. I did not dig deep enough to find out, but I am curious.
Matt
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. You may lose more than your initial investment. All posts are opinions and do not claim to be facts. Please conduct your own due diligence. Use only Risk capital when trading Futures.
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I find it funny when forex brokers use the argument of liquidity when speaking to people who are going to be opening up a $100 account with them. And it's even more funny when traders rehash this argument on forums.
On a more serious note, find an instrument that fits your needs, and trade it. Everything has its ups and downs, pros and cons. Like, there are different arguments for and against trading the SPY vs. the ES. The same thing with EUR/USD vs. 6E.
