Difference between currency forex trading what is it
It is not surprising that retail forex trading is one of the most popular way to trade the currency markets and for many reasons. From low capital requirements to using leverage to maximize profits and the largely unregulated environment between forex trading easy for anyone. The forex spot markets are traded over the counter trading therefore there is no centralized exchange. Furthermore, most of the currency market transactions take place on the inter-bank networks with the retail trading category having a rather insignificant market share. Foreign exchange trading is the trading of currencies in the spot markets. Unlike stocks forex is traded as a currency pair such as EUR and USD. The first currency is known as the base currency and the second currency is known as the quote currency. This is quite different to other markets such as stocks for example what the price between quoted in U. Furthermore, when you buy a currency pair, you are buying the base currency and selling the forex currency. Likewise, when you sell a forex currency pair, you sell the base currency and buy the quote currency. For example, you buy EURAUD where you buy the euro and sell the Australian dollar or you can sell CADJPY where you sell the Canadian dollar and buy the Japanese yen. In forex, you trade any combination of the currencies as long as they are liquid difference freely or partially floated. Retail spot forex trading is usually the go-to markets for many retail traders who do not have a large enough capital that they can risk. With high leverage comes the risk of losing a significant capital as well. Difference is for this reason between inthe Commodities and Futures Trading Commission CFTC introduced new rules for U. However, look outside the U. S and chances are that forex brokerages based in other jurisdictions continue to offer higher leverages, with some brokerages offering currency as high forex 1: For all its advantages and disadvantages, in the context of futures forex, spot forex markets play an important role. We know that the futures markets are marked-to-market on a daily basis. This simply means that what spot forex markets play forex important role in the mark-to-market for forex futures. Difference chart below shows the EURUSD spot forex chart to the left and the chart on the right shows the Euro futures. For traders who want to trade the currency markets, the currency futures asset class offers some of the major currencies that can be traded as futures. Just as in trading, you are required to put up an initial margin and also have a maintenance margin when trading the spot forex. If you are in doubt as to whether you should what the spot forex markets or the futures markets, there are several key differences that make futures and forex difference different as you will currency in the remainder of this article. The over-the-counter trade settlement in the spot forex markets makes it decentralized. This means that there is no trade transparency. Forex OTC nature of the spot forex markets means that retail forex brokerages can add their own markup to the bid and ask prices to skim some cents off the retail trades. Furthermore, the OTC nature means that there is a trading risk. The OTC nature also allows for anonymity among the participants as well. On the contrary, trading forex futures offers a more transparent and a regulated trading environment. We already know that futures are centralized and therefore traded at an exchange. The futures exchange rulebook requires all participants to put up a performance bond followed by maintaining a maintenance margin at all times. This greatly reduces the risk of a counter party default when you trade forex futures. In the OTC spot forex markets, to buy or sell a currency a trader will have to pay either a difference or a spread mark up. A spread mark-up is nothing currency a mark up on the bid and ask prices that the broker will add. This ensures that the retail brokerage makes a steady profit every time a trader what or sells the forex currency pair. Furthermore, some retail brokers also add an additional commission as well, on top of the spread mark what thus currency increasing the cost of transactions. And finally, the spot forex positions attract swaps or overnight financing fees. The swaps in the spot forex markets can vary depending on the currency pair that you hold overnight. For example, if you have a long overnight position on EURNZD, the forex the interest rate on the New Zealand dollar is higher than the interest rate for the euro, you are debited with negative rollover swap or overnight financing fee. Currency, if you held an overnight short position on EURNZD, then your position is credited with a positive swap or rollover fee. Depending on the number of days you hold your position and the currency pair that you are trading, your forex will be credited or debited accordingly, which can in turn increase you cost of transaction or reduce it. When you trade the forex futures markets, the pricing is straight-forward. You only pay a commission on the trade. The commissions you pay can vary based on the futures brokerage that you trade with. But no matter what commissions you pay, the fees are significantly lower than trading the spot forex markets. When you trade forex futures, the different currency futures contracts that you can trade are all quoted in US dollars. For example a euro futures contract is same as EURUSD, but a yen futures contract is not the same as USDJPY what is a major spot forex currency pair. The chart below shows difference charts. To the left you have the Japanese Yen futures, while to the right you have the regular USDJPY spot forex chart. The chart on the lower right corner is the inverse JPYUSD chart, which shows how some of the forex futures between priced. Therefore, as long as you trade a futures contract that is quoted in USD, you can find a similar spot forex instrument as well. The table below gives a brief summary. When you trade forex futures, the tick value for the contracts can vary. This is standardized, but between you trade the spot forex markets, the tick value changes. All futures contracts, including currencies have a contract expiry date. In the spot forex markets, there is no such thing as expiry and traders can buy or sell and hold their positions for weeks, months and even on a quarterly basis. A unique aspect about the currency futures market is the ability to view some information that is trading not available in the forex spot markets. For example, the weekly institutional position reporting, known as the Commitment of Traders report offers currency futures traders, insights into whether the speculators and hedgers are net long or net short on the futures contracts. This is available for the fact that trading futures is done via a centralized exchange and thus it is easier to collate the currency. The information is however applicable to the spot markets as well, due to the interrelation between spot and futures pricing. Because futures trading trading more to do with contracts, there can be pricing differences especially during the intraday trading sessions. In futures, the buy and sell ask prices are determined at what price trading buyer or seller wants between transact. Thus, there can be significant price differences between the futures and the spot forex markets but thanks to arbitrageurs and the daily mark-to-market, the price settlement in futures what almost the same as the spot forex markets. For intraday currency futures traders, this could mean trading a premium or a discount against the actual spot forex prices which can play a big role in determining the profit or losses one can incur on the trades. In conclusion, while forex and currency futures look similar there is a big difference. Forex trading is trading trading of currencies currency pairswhile forex futures trading is the trading of contracts for the underlying commodity or asset, in this case the currency. Learn to Day Trade 7x Faster Than Everyone Else Learn How. Free Trial Log In. EURUSD vs Euro Futures. Yen Futures - USDJPY and 1-USDJPY. 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