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jake g

Forex and Futures

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New guy question; hope it's not too naive.

 

I came across an interesting article, but I don't know what I'm talking about. Perhaps it's way off. In a nut shell they say forex is better than futures because its more liquid, can be traded all day, small commissions, less slippage, greater leverage, and reduced risk via automatic margin calls. Is there exaggeration here, and if so, how do you think such issues should be properly conceive of? Please and thank you. Would you say these points are represented accurately?

 

More specifically, I'm asking that because of these aspects of forex, would if function better for a beginning trader, rather than stocks or futures? It sounds like certain pit falls have been removed from the overall challenge. Or reduced.

 

Here's the article

 

"The forex market also boasts of a bunch of advantages over the futures market, similar to its advantages over stocks. But wait, there’s more… So much more!

 

Liquidity

 

In the forex market, $4 trillion is traded daily, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. The futures market trades a puny $30 billion per day. Thirty billion? Peanuts!The futures markets can’t compete with its relatively limited liquidity. The forex market is always liquid, meaning positions can be liquidated and stop orders executed with little or no slippage except in extremely volatile market conditions.

 

24-Hour Market

 

At 5:00 pm EST Sunday, trading begins as markets open in Sydney. At 7:00 pm EST the Tokyo market opens, followed by London at 3:00 am EST. And finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST. Before New York trading closes, the Sydney market is back open – it’s a 24-hour seamless market!As a trader, this allows you to react to favorable or unfavorable news by trading immediately. If important data comes in from the United Kingdom or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride. (Overnight markets in futures currency contracts exist, but they are thinly traded, not very liquid, and are difficult for the average investor to access.)

 

Minimal or no commissions

 

With Electronic Communications Brokers becoming more popular and prevalent over the past couple of years, there is the chance that a broker may require you to pay commissions. But really, the commission fees are peanuts compared to what you pay in the futures market. The competition among brokers is so fierce that you will most likely get the best quotes and very low transaction costs.

 

Price Certainty

 

When trading forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution. Even with the advent of electronic trading and limited guarantees of execution speed, the prices for fills for futures and equities on market orders are far from certain. The prices quoted by brokers often represent the LAST trade, not necessarily the price for which the contract will be filled.

 

Guaranteed Limited Risk

 

Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account. Risk is minimized in the spot forex market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account. During normal market conditions, all open positions will be closed immediately (during fast market conditions, your position could be closed beyond your stop loss level).In the futures market, your position may be liquidated at a loss bigger than what you had in your account, and you will be liable for any resulting deficit in the account. That sucks."

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Hello and welcome.

 

I will take a crack at answering your question.

 

I personally believe Forex is an excellent place for beginning traders for 1 simple reason. Very granular risk management. What do I mean by that? In Forex you have the option to risk anywhere from under 10 cents per pip/point on a trade on up to any amount. In the futures market the minimum you can risk is locked into the contract size.

 

As for the other points raised in the article I will comment on them each

 

Liquidity:

It is true the Forex is one of the most liquid markets, but at the level you and I trade this is almost a non factor. This is more of a concern if you are trading huge lots and need to get a good price on your fill with lots of size.

 

24-Hour Market:

This is also true however this isn't necessarily a major "plus" for forex. Just because it is open 24 hours doesn't mean you should be trading it 24 hours. It does have the advantage however of allowing you to trade the Asian market hours in the evening say after you are home from your day job when the US futures markets are closed.

 

Minimal or no commissions:

This is a bit of a deceptive statement. While a forex broker may not charge commisions like you would have in futures, what you do have to account for is the pip spread. Typically when a broker charges no commisions you will have a bit larger of a spread. This is just a very general statement and commissions and spreads vary widely. It's best to do some homework on the brokers and look for one with direct order filling (no middle man or order desk) and low comissions/spreads. I personally use MB Trading (no affiliation).

 

Price Certainty:

This is almost an outright false statement in my opinion. Execution of your order depends on many things to include your broker, market conditions, and liquidity. You can get slow and bad fills in forex just as you would in Futures trading. It's all about finding a good broker here.

 

 

Guaranteed Limited Risk

Ths is a very very deceptive statement. You and you alone are responsible for limiting your risk, whether that be with a protective stop loss, or trading at a responsible level of leverage or both. These factors are the same accross all markets and platforms. There is nothing "guaranteed" here. Forex does however allow you to really limit risk and trade smaller than you could in the Future markets.

 

Hope this answers your questions.

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The foreign exchange market is the place where currencies are traded.The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world.

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  jake g said:
New guy question; hope it's not too naive.

 

I came across an interesting article, but I don't know what I'm talking about. Perhaps it's way off. In a nut shell they say forex is better than futures because its more liquid, can be traded all day, small commissions, less slippage, greater leverage, and reduced risk via automatic margin calls. Is there exaggeration here, and if so, how do you think such issues should be properly conceive of? Please and thank you. Would you say these points are represented accurately?

 

More specifically, I'm asking that because of these aspects of forex, would if function better for a beginning trader, rather than stocks or futures? It sounds like certain pit falls have been removed from the overall challenge. Or reduced.

 

Here's the article

 

"The forex market also boasts of a bunch of advantages over the futures market, similar to its advantages over stocks. But wait, there’s more… So much more!

 

To begin with, any article that begins with "but wait, there's more, so much more" can be discounted at the outset, much less one that also ends with "that sucks".

 

Second, forex is a terrible market for beginners in that it encourages exactly those behaviors that doom beginners to failure, not the least of which is overtrading.

 

Third, before you come within a country mile of leverage, you need to learn how to trade. Forex is not the place to learn how to trade.

 

Fourth, unless you want to become a scalper, learn how to trade before focusing on daytrading. Otherwise you'll be thrashed around in a maelstrom of conflicting forces you don't understand and won't have a hope in hell of managing.

 

Begin by developing a thoroughly-tested and consistently-profitable trading plan. Without one, you will fail.

 

When you get to the point of choosing your market, characterize all that you're interested in (see Appendix E, here). Only then will you know whether or not that market might meet your objectives.

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  DbPhoenix said:

 

Third, before you come within a country mile of leverage, you need to learn how to trade. Forex is not the place to learn how to trade.

 

 

I totally agree. I will add that no market is good for learning how to trade.

 

An individual who wants to trade a market should know how to trade first and then learn to trade a particular market.

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he foreign exchange market is a global decentralized or over-the-counter market for the trading of currencies. This market determines the foreign exchange rate. It includes all aspects of buying, selling and exchanging currencies at current or determined prices.

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A forex future is an exchange-traded contract to buy or sell a specified amount of a given currency at a predetermined price on a set date in the future. ... The price of the futures contract is based off the underlying asset: the forex rate

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I think forex is a great place for beginners 

Before they begin, they need to know the following:

There are two distinct features to currencies as an asset class:

  • You can earn the interest rate differential between two currencies.
  • You can profit from changes in the exchange rate.

An investor can profit from the difference between two interest rates in two different economies by buying the currency with the higher interest rate and shorting the currency with the lower interest rate. Prior to the 2008 financial crisis, it was very common to short the Japanese yen (JPY) and buy British pounds (GBP) because the interest rate differential was very large. This strategy is sometimes referred to as a "carry trade."

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A forex future is an exchange-traded contract to buy or sell a specified amount of a given currency at a predetermined price on a set date in the future. All forex futures are written with a specific termination date, at which point delivery of the currency must occur unless an offsetting trade is made on the initial position.

Edited by mukti

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Nothing happens because it was money I could lose, and my intention was to test the system and prove myself. The system works because I learned it in a course with David Aránzabal who is one of the foremost International Forex Traders, especially in the Hispanic channel.

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