In your trading journey, you may come to a crossroads: Futures vs Forex. On one side, a vibrant marketplace offers you access to a variety of commodities, indices, and currencies. On the other side, a shimmering sea of currencies offers you round-the-clock trading.
If you're not sure of the differences or which you should trade, this article will help you. Although the choice is yours, I believe there's a strong winner.
First, let's compare the hard facts of these two markets.
Market Regulation
Boo, regulations! Well, maybe but not quite. In trading, some regulations help protect you from companies that might try to take advantage of you.
Futures
Futures trade on centralized exchanges like the CME or CBOT. These exchanges set the same rules for everyone trading on the exchange. They ensure price transparency, volume transparency, and standardized contracts.
Forex
Forex trades on countless decentralized platforms. Although this allows you to trade 24/7, it means you could be trading at a bad price without knowing it.
Think of it like this: A futures exchange is like a farmer's market where every vendor and shopper agrees to the same price for apples at any given time, and everyone can see how many apples have been bought. A forex market doesn't show you how many apples have been sold or what other people are paying for them. You just have to trust the pricing of the one vendor you haggle with.
Contract Specifications
Contract specifications mean "what you see is what you get". Just so we're in agreement, when that's true, it's a good thing.
Futures
Specifications for futures contracts set the size of the contract, expiration date, and tick size. So, every trader can count on these things. The tick size is the most important thing here for traders, since that makes the "spread" you pay.
So, everyone trading Nasdaq 100 futures for example, is trading it with 1/4 point ticks, each equal to $5. So, if you reach across and buy the ask, you pay a $5 spread.
Contract sizes are mini (full size) or micro (1/10 of full size)
Forex
Forex markets do specify size, but they don't specify spread. So, your spread is determined by your broker. Forex brokers make the market you trade in, so they decide at what price they'll sell to you or buy from you.
The difference between those prices is the spread, and there's no standard amount for that spread. The spread can also change from trade to trade.
Key Takeaway:
Think of futures like buying a car at a published set price. Meanwhile, forex would be more like haggling with a car salesman who is just trying to make more room for his commission.
Leverage
Leverage gives you the ability to trade a position much larger than the capital you have available. It can amplify your gains and your losses. The lower your margin requirement, the more leverage you have.
Futures
Futures margin requirements are set by the futures exchanges. Exchanges offer very low margin requirements, which means traders can control a larger position with less capital.
Forex
Forex margin requirements are set by each individual broker, and may vary significantly from company to company. It's up to you to shop around and determine what is a good deal. Some of them may have lower margin requirements than futures, some may have higher margin requirements.
Key Takeaway:
Both futures and forex markets offer plenty of leverage. In fact, many traders find it can be more leverage than they're prepared for when starting out.
Depth of Market
In transparent markets, you can see the depth of the market, meaning the volume of bids and offers waiting to be filled. This can give traders a better idea of supply and demand at different price levels.
Futures exchanges provide depth-of-market data. Screenshot courtesy of TD Ameritrade.
Futures
Futures exchanges publish all orders, so the depth of market is visible. Some brokers show this information as a default, some others offer the data as an add-on.
Forex
Forex markets don't show depth of market. At best, some brokers may show bids and offers on their own book, but this is not common.
Even then, you're only seeing part of the market, since every broker's data is missing the data from all the other brokers offering that currency pair.
Variety of Instruments
When considering futures vs forex, instrument variety appeals to many traders. Whether you want to make pairs trades, trade non-correlated symbols, or diversify exposure, variety can help.
Futures
Trading futures gives you access to commodities, indices, and currencies. So you can trade everything from the Nasdaq 100, to gold and oil, to the dollar or bitcoin.
Forex
Forex trading limits you to currency pairs, so while you can trade various currencies, you don't have nearly as much variety as with futures.
Key Takeaway:
If you prefer some variety in what you can trade, a futures account gives you more options by default.
Trading Hours
Flexibility in trading hours may be important to traders who trade around work schedules, family time, etc. Both future and Forex markets offer flexibility enough for most traders, but there are some differences.
Futures
Futures markets trade from Sunday at 6pm ET to Friday at 5pm ET, with only an hour break each day at 5pm ET.
Forex
Forex markets for retail traders are open from Sunday at 5pm ET to Friday 5pm ET, with no breaks in between, although the days are broken into several overlapping sessions.
Key Takeaway:
Both futures and forex provide more than enough flexibility in trading times to accommodate any trader's schedule. At the same time, you should remember that just because you can trade during a certain time window, doesn't mean you should trade at that time.
FUTURES | FOREX | |
|---|---|---|
REGULATION FOR TRADER PROTECTION | ||
CONTRACT STANDARDIZATION | ||
LEVERAGE | ||
INSTRUMENT VARIETY | INDEXES, COMMODITIES, CURRENCIES | CURRENCIES |
TRADING HOURS | 115 HOURS / WEEK | 120 HOURS / WEEK |
Forex vs Futures: Other Frequently Asked Questions
Some traders may still not be sure what is best for them, so lets answer any questions you still may have.
Is Forex Harder than Futures?
Technically, yes, forex is harder than futures. It's hard to compare the two markets apples to apples, but a few things make forex inherently harder:
1) Less transparency - Any time you have less transparency, it's easier for the odds to be stacked against you.
Forex lacks transparency in pricing, market depth, and spreads.
2) Uneven playing field - not all brokers are playing by the same rules, so you may not know if you're getting a raw deal
Are Currency Futures the Same as Forex?
Great question! The answer is "no", but there's more to it than that.
When trading futures, you're trading a futures contract. That contract is a standardized agreement to buy or sell at a specified price, contract size and date. Those futures contracts are traded on futures exchanges.
With forex futures, each contract specifies a price, size, and date for whatever currency it derives from.
In this way, you can trade forex using futures, which provides additional transparency on pricing, size, depth of market, and spread.
Futures Prop Firms vs Forex Prop Firms: Which is Better?
Just like regular futures trading vs forex, futures prop firms carry many of the same benefits vs forex prop firms. Let's dig in deeper though.
Trading Simulations
All prop trading evaluations use simulated accounts, meaning your orders aren't actually trading live in the market.
With futures trading simulations, your trades are still based on the price, time and sales, and market depth of the actual exchange.
With forex trading simulations, you have no idea what pricing is being given to you. Is it based off a broker? Is it made up by the firm? No way to know. Forex traders with My Forex Funds recently found out they were being scammed, and unfortunately that could be common among forex prop firms.
Funded Accounts
When you trade with online prop firms, your goal is to get a funded account. Many firms start you out on a LiveSim, where you can get paid off your simulated trading, before moving you into a live account.
With funded futures accounts, you are trading live on the exchange.
With funded forex accounts, you could still just be trading the internal market owned by the forex funding firm, so it could still be a synthetic market. At best, it still carries the same transparency problems that plague any forex trading account.
Futures trading prop firms definitely win vs forex prop firms.
Trading Evaluation Costs
Futures prop firm evaluation costs vary, and so do Forex prop firm evaluations.
However, on average, Forex prop firms charge much more for evaluations. With discounts, some futures trading evaluations can be had for less than $20. With Forex, the least you'll ever pay is several hundred dollars, and some of them even costs thousands of dollars.
I've never seen a single reason to justify why the forex evaluations are so much more expensive. There doesn't seem to be any benefit to paying more.