Traditional trading (spot market) is quite similar to the futures market. Both sectors are used by traders to speculate on currencies and exchange rates. At the same time, they have some fundamental differences one should clarify before entering any of these markets.
In this article, we will discuss the crucial pros and cons of trading and the futures market. It will help you make up your mind on the best-matching option if you are not sure which one will suit your strategies.
Traditional Trading Basics
Also known as the spot market, traditional trading comes with several fundamental ins and outs. It is a decentralized financial environment that hosts a global cash market for currencies. The sector is operated by a worldwide network that consists of different financial institutions, banks, online brokers, and other market participants.
traders buy and sell currencies in pairs. The exchange rate generally relies on the quoted quantity rather than the price. Since one currency is exchanged for another, quotes play a major role every time a transaction takes place.
Trading Pros and Cons
Traditional trading comes with a set of obvious advantages. Basically, it is one of the most-traded markets with a variety of strategies to apply depending on one’s preferences.
High Liquidity. The market is unregulated. It means deep liquidity and the massive size of the market itself. Even large transactions will hardly move the market significantly.
High Leverage. It depends on the region where you trade. Generally, the leverage relies on the jurisdiction. For instance, in the United States, traders can leverage up to 50:1 on major currency pairs. When it comes to unregulated jurisdiction, traders can benefit even from better conditions like 1:1000 leverage delivered by a top online broker.
Market Accessibility. You can trade currencies 24/7 without limitations. Besides, users can enter the market with a minimum deposit and buy or sell currencies on the go via smartphone.
Zero Commissions. markets are the ones to offer a commission-free trading experience. If you choose a trusted online broker, you can benefit from trading accounts with zero commissions right from the start.
Good for Islamic Accounts. Different online brokers customize their trading conditions to offer financial and investment services to users from Islamic countries.
Unregulated Market. When we say “unregulated”, we mean decentralized. In simpler words, the market can explode at any moment. What’s more, users can be potentially exposed to scams. This is why it is very important to select a trusted and reliable broker.
Lacking Quote Consistency. Exchange rates can vary depending on the source you use to generate actual quotes.
Unexpected Market Moves. At some point, the market can move sharply and suddenly. This will make the exchange rate extremely volatile. So, one needs to be very careful when taking another position during market turbulence to avoid huge losses.
trading can still be a safe and steady way to gain wealth. All you need is to use risk-management tips, set stop-losses and trade with a trusted broker to minimize the risk of loss.
Futures Trading Basics
As you probably know, futures represent derivative contracts to exchange physical assets. However, they can also be used for currency speculation and hedging. Basically, it is an agreement to purchase or sell an asset by a predefined date. When we say “asset”, we also mean a currency pair in the case of currency futures.
Currency futures are traded on the CME. They can be of different contract lot sizes: e-micro, e-mini, and standard). Lots are expressed in foreign currencies featuring exchange rates that are usually quoted in USD, the major currency that represents one of the world’s strongest economies.
Futures Trading Pros and Cons
Just like traditional or spot trading, currency futures come with specific advantages and disadvantages. They will eventually define which market to choose and why.
Currency Futures Pros:
Regulated Market. The futures market is fully regulated, even if you trade currencies. Each transaction is supervised by CFTC and CME, making it absolutely safe for users in terms of scam prevention.
Transparent Operations. Traders see the same quotes despite the source they use. Every market participant has exactly the same data, which makes futures trading transparent.
Deep Liquidity. Although the currency futures market cannot both have the same liquidity as the market, it is still significantly liquid, as it still derives quotes from the exchange rate from the enormous over-the-counter market.
Currency Futures Cons:
Stricter Requirements. Futures markets generally come with higher capital requirements. Additionally, one will have to use a margin account to leverage the futures position. It can lead to huge losses and even a margin call if something goes wrong.
Lower Leverage. Traders should not expect leverage higher than 30:1 for major currencies. If you opt for exotic pairs, it will be even lower (20:1). It is definitely lower than the leverage offered by the spot market.
Commissions and Fees. As a currency futures trader, you will have to pay pre-contract commissions. They are established for every new contract you sell or purchase. This factor results in increased trading costs not everyone can afford. Additionally, investors will need to pay an exchange fee. The size of the fee depends on the contract size.
The Bottom Line
Both approaches can be good for trading. Each of them can be used to hedge and speculate on the currency. However, spot trading looks like a better and safe option. It provides enhanced market accessibility with a chance to enter with a minimum deposit.
Oppositely, currency futures come with increased trading costs. Investors will have to pay specific fees and commissions not to mention using a margin account that brings additional risk to having a margin call. Anyway, it is up to you to decide which strategy meets your requirements.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.