Jun 24, 2020
Foreign currency futures
The largest forex futures exchange is the Chicago Mercantile Exchange, but there are other similar exchanges around the world.
What are the advantages and disadvantages of forex futures trading and forex spot trading?
Cons: When trading forex futures, you must deposit more with your broker than you normally would with forex cash.
That's because futures are leveraged.
When you buy currency futures, you are essentially buying a contract to buy a predetermined amount of currency at a future date.
So if the price goes against you, not only do you lose your savings, but you also have to pay an extra deposit (maintenance margin) as long as your position is empty.
Also, you can only trade during trading hours.
So if the market swings wildly at the close of an exchange, you have to wait until after the exchange opens.
When you trade futures, you must pay a commission to your broker and a fee to the exchange.
With cash forex, you only pay the difference between the bid-ask spread.
Pros: Back to leverage, if the market favors you, you can make more money than in the spot market.
Generally, the bid-ask spread for futures is lower than the bid-ask spread for cash.
Counterparty risk is also reduced because all trades are settled through central clearinghouses and standardised contract terms make the process of hedging cash positions much easier.