Whether you’re a day-trading guru or options aficionado there are important differences between trading forex and currency futures that you should always be aware of.
No one enjoys playing a game where the opposition has an unfair advantage. In the unregulated forex market, the major banks could get first dibs on the best market prices for the currency, and the moves they make on the interbank market could affect the price the individual investor sees. With currency futures markets like those on the CME and ICE, however, regulations are in place to allow for fair price discovery. With many buyers and sellers, fair price discovery helps to curb the ability for an individual to corner a market.
Futures markets and the exchanges that they trade on are designated by the Commodity Futures Trading Commission, a body created by the US Congress. By virtue of constant oversight, these exchanges (and by proxy, these markets) have been designed to accommodate more judicious trading. The contracts contain exact specifications developed to suit the needs of that particular currency. Participants in these markets are held accountable; margin is required, and the addition of this performance bond (as well as the participation of clearing firms) protects traders. Since participants in futures markets are required to have accounts with reputable firms that also aim to prevent alleged fraudulent activity that has been known to occur on forex markets with less-than-reputable forex brokers.
Without a governing body overseeing the action in forex, an investor could be taken advantage of without his/her knowledge – and have no recourse for recovery. With currency futures, however, the National Futures Association has set numerous rules and regulations to ensure that the investor is protected from fraudulent trading practices.
No matter what trading venue or technique you use when trading currencies, it is important to remember there is substantial risk of loss. Only trade with risk capital and carefully evaluate the suitability of trading these markets to your individual investment goals.
Before you go jumping into any kind of trading, it pays to know what kind of environment you are trading in. Being well versed in both markets and understanding the pitfalls (as well as the advantages) is as important to your trading as good trade design and the utilization of different strategies. Register for a FREE report here!
