Trading Forex Contracts Vs

Trading forex contracts vs

Perhaps the oldest standardized mode of trade involves the swapping of foreign currencies.

Forex or Stocks: Comparing Liquidity

Exchanging one form of money for another has long been an unavoidable aspect of travel, as well as a speculative endeavor. Whether you’re a professional arbitrager or simply striking out abroad, the currency trade is an indispensable component of international commerce.

In the arena of active trading, currencies are engaged via the futures or forex marketplaces. Each venue furnishes participants with unique offerings and specific advantages to using its infrastructure.

Here we break down the differences of futures vs. forex currency trading.

The Forex

The term “forex” is an abbreviation for “foreign exchange marketplace.” An exclusively digital over-the-counter (OTC) venue, the forex facilitates the trade of currencies throughout the world.

Trading forex contracts vs

In terms of size, it’s the world’s largest market. According to the Bank for International Settlements’ (BIS), daily turnover on the forex averaged a staggering US$5.1 trillion for 2016.

Forex trading is conducted by “pairing” one currency with another in order to create a tangible exchange rate for reference.

Best cryptocurrency returns in 2020

In practice, one currency is bought while another is simultaneously sold on the open market. In this fashion, the relative value of the pair is able to be traded in a standardized manner.

The forex is dominated by the eight prominent global currencies and their pairings, known as the “majors.” The majors represent more than 60 percent of daily turnover, making them the most liquid and suitable products for short-term traders.

PairCurrenciesNickname
EUR/USDEuro/U.S.

CFD vs Forex

Dollar

Fiber
USD/JPYU.S. Dollar/Japanese YenGopher
GBP/USDBritish Pound/U.S.

Best fps launch options for paladins

Dollar

Cable
USD/CADU.S. Dollar/Canadian DollarLoonie
USD/CHFU.S. Dollar/Swiss FrancSwissie
AUD/USDAustralian Dollar/U.S.

Trading forex contracts vs

Dollar

Aussie
NZD/USDNew Zealand Dollar/U.S. DollarKiwi

As the world’s reserve currency, it stands to reason that the U.S.

Differences of CFDs and Forex

dollar plays a role in the eight major pairings. In fact, it is involved in more than 90 percent of all traded forex volume.

Spot Forex vs Futures Market Trading

Two other classifications of currency pairs listed on the forex are known as “minors” and “exotics.” Here are a few of the most commonly traded minor and exotic pairs:

MinorsCurrencies
EUR/GBPEuro/British Pound
EUR/CHFEuro/Swiss Franc
EUR/CADEuro/Canadian Dollar
GBP/JPYBritish Pound/Japanese Yen
GBP/CHFBritish Pound/Swiss Franc
CHF/JPYSwiss Franc/Japanese Yen
NZD/JPYNew Zealand Dollar/Japanese Yen

 

ExoticsCurrencies
USD/SEKU.S.

Dollar/Swedish Krona

USD/ZARU.S. Dollar/South African Rand
USD/HKDU.S.

Dollar/Hong Kong Dollar

EUR/TRYEuro/Turkish Lira

A majority of the minors and exotics are marked by wide bid/ask spreads and limited liquidity.

Trading forex contracts vs

As a result, many active traders steer clear of the minors and exotics altogether.

Currency Futures

Currency futures, or FX futures, are another way individuals can trade their opinions regarding the economic prowess of nations around the globe.

FX futures are a representation of what a foreign currency will be worth in U.S. dollars at a specific point in time.

Sign up for our award-winning newsletter

In contrast to the forex, FX futures are priced in U.S. dollars per unit of the foreign currency in question and have a defined expiration date.

The Chicago Mercantile Exchange (CME) has a collection of FX futures contracts available for trade including the majors, emerging markets, and crosses.

MajorsSymbol
Euro FX6E
Japanese Yen6J
British Pound6B
Australian Dollar6A
Canadian Dollar6C
Swiss Franc6S
New Zealand Dollar6N

A group of emerging market currency contracts — such as the Mexican peso (6M), Brazilian Real (6L) and Russian Ruble (6R) — are denominated in U.S.

Trading forex contracts vs

dollars and available for trade under sparse liquidity.

In addition, the CME offers several cross rates facing a broad spectrum of currencies, with pricing independent of the U.S.

dollar.

24-Hour Market

However, liquidity is limited because trading volumes are relatively small.

What Will It Be: Futures vs. Forex

Both the futures and forex markets are licensed and regulated by jurisdictional financial authorities. Given the selection of an accredited brokerage service, a trader can be confident that deposited funds are secure.

Depending on the trader’s resources and objectives, one market may be preferable to the other.

Trading forex contracts vs

Here are a several facets of each market that you should consider:

  • Forex
    • Pros: Highly liquid, variety of instruments, no expiration, no daily market close
    • Cons: Interest costs (rollover), lack of transparency, variable spread pricing
  • Futures
    • Pros: All-in upfront pricing, no carry costs, ideal for hedging
    • Cons: Overnight margins, contract expiration

Each marketplace offers several unique advantages and disadvantages to active traders.

For guidance on which venue may be best suited for your resources and needs, check out Daniels Trading’s currency futures overview and related webinars.

Filed Under: Tips & Strategies