Investors are often confused between forex and futures trading because both allow them to trade on the prices of currencies, commodities, and other assets. However, some vital differences are essential that traders consider before deciding which one to trade.
The primary differences between forex and futures?
One of the main differences is that investors trade directly on the spot market in forex trading. In contrast, in futures trading, they trade on a contract that will be settled later, meaning that with forex trading, investors can take advantage of changes in prices immediately. In contrast, with futures trading, they have to wait until the settlement date to receive any profits or losses.
Another difference is that forex trading is mainly done through brokers, while futures trading is done through exchanges, meaning that the latter is more regulated than the former.
Finally, another key difference is that forex trading has much higher leverage than futures trading, which means investors can control a more significant amount of money with less capital. However, this also means that forex trading is riskier than futures trading.
What are the risks associated with forex trading?
The main risk associated with forex trading is the leveraged nature of the market, meaning that a slight price change can lead to a significant loss or gain. For example, if an investor has a leveraged position of $100 and the price moves by 1%, the investor will make or lose $1. However, if the price moves by 10%, the investor will make or lose $10.
Another risk is that forex trading is done through brokers, which means there is less regulation than futures trading, leading to possible fraud and other abuses.
Finally, a risk is that forex trading is done in a decentralised market. There is no central authority to determine prices or regulate trade, leading to volatile prices and wide swings in price driven partially by investor sentiment.
What are the risks associated with futures trading?
The main risk associated with futures trading is it is based on a contract, and there may be a potential reduction in asset prices that you have purchased as its expiration date approaches. In bad circumstances, the contract may even be entirely worthless.
Another risk is that futures contracts are often traded on margin as well, which means that a slight price change can lead to a significant loss or gain. For example, if an investor has a contract for 10,000 barrels of oil and the price moves by 1%, then the investor will make or lose $100. However, if the price moves by 10%, the investor will make or lose $1,000.
So, what should you trade?
It depends on your goals and objectives. If you are looking for immediate exposure to changes in prices, then forex trading would be better. If you are looking for a more regulated environment and are willing to wait for the settlement date, futures trading would be better. Forex trading and futures trading are two popular ways to trade on the prices of currencies, commodities, stocks and other assets. Traders should consider some glaring differences before deciding which one to trade.
Conclusion
When it comes to forex trading, the main difference is that it is done through brokers, while futures trading is done through exchanges, which means that the latter is more regulated than the former. Forex trading and futures trading are both popular ways to trade on the prices of assets. However, remember some critical differences between the two that traders should consider before deciding which one to trade. Beginner traders in the UK who want to trade forex or futures are advised to contact an experienced and reliable online broker such as Saxo Bank. Look at this site for more information.