The Difference Between Forex And Futures
Law of supply and demand. In the 19th century, farmers began entering futures contracts, one which required them to deliver their products at a later date at an agreed on price.
Now, futures do not necessarily have anything to with agricultural products. There is already a futures market for practically all types of goods, including manufactured goods, agricultural products, even financial instruments like treasury bonds.
And while we're at it, futures contracts have become in themselves a trading instrument that can rake in huge profits for the trader - very much like trading in the forex. But while we maybe tempted to point out further similarities between futures trading and forex trading, there is a blank wall. This is because forex trading so far outpaces futures trading in terms of advantages and stability, among other things.
THE LONG AND SHORT OF FUTURES
Futures contracts are usually traded by speculators. It really doesn't matter what good is the subject of a particular contract. What does matter is the daily fluctuation in the prices of the good that is the subject of the futures contact.
Speculators profit on such a contract by either buying the contract from the seller or the buyer. In futures trading parlance, the seller has the SHORT POSITION while the buyer takes the LONG POSITION. A futures contact has a specific buying price, quantity and delivery date.
Speculators always hope to profit by buying long if they expect prices to rise, or buying short if they expect prices to fall. Futures transactions are settled everyday.
FOREX VS FUTURES
At the end of the day, forex transactions edges the futures market in terms of advantages. The best proof of this is the sheer amount of money being traded daily in forex trading: around $1.5 trillion dollars everyday, dwarfing the entire futures market in daily trading.
Forex market is a lot more liquid, and it's easier to execute stop orders. Forex have longer trading hours - 24 hours daily, and five days a week. Futures exchanges are typically open only seven hours in a five day work week.
Forex traders can thus position themselves in trading opportunities as they arise - they do not have to wait for an exchange to open.
Forex transactions are also commission-free since the brokers make the money by setting a spread - or the difference between the buying price and selling price of a currency. Futures brokers, on the other hand, charge a commission or brokerage fee.