Currency Futures and Forex Futures
You can trade full-size currency futures ($125,000) contracts, and mini-size Forex Futures contracts at the Chicago Mercantile Exchange. Here are the advantages. At this time we do not recommend trading mini-size Forex Futures because they are not sufficiently liquid.
You are trading at a regulated exchange, not with an unregulated broker or bank.
The regulations for futures are far more extensive than you can find with a Forex dealer, even if that dealer is registered with the CFTC and the NFA.
In futures, your account is completely protected against broker or bank failure. No one has ever lost a cent when a futures broker or a bank has gone bust.
In futures there is 100% Transparency: Everyone sees the same price at the same time. This is not true when trading Forex.
Money with a futures broker is safer than money at a bank. This is because of the "Mark-to-Market" structure of a futures broker's account. At the end of every trading session, every futures broker must show that there is cash or equivalent on hand to cover every open position. That cash must be held at a bank and be completely segregated from both the broker's funds and the bank's funds.
The value of a minimum fluctuation (called a tick) is constant and never changes, unlike a Forex pip, where a minimum fluctuation can change from day to day.
There is no requirement for interest to be received or paid when a contract is held overnight.
With Forex, if you hold overnight, the following day you are in a new contract. Futures contracts last for 3 months before being renewed.
Futures commissions are low and are negotiable. The spread in any liquid contract is almost always 1 tick, not 3 as with some Forex Brokers.
Data, platform and charts are free with some futures brokers.
The exchange is the buyer and seller of last resort, not so with Forex brokers.
If you prefer to trade currency pairs in the Forex Markets the following cautions are shown below. Be careful to avoid Forex scams. Sadly, there are many.
When you open a Forex account, it’s not like having your money at a bank with depositor insurance. It’s not like opening a futures account where your money is guaranteed because of the exchange’s mark-to-market rules. You simply have to choose a reputable firm or you could lose your trading account. That’s right, you could lose every cent. Such loss has already happened when Forex brokers have gone broke! So it’s up to you to choose a good broker. Later, I’ll explain how to do it.
Ever since retail Forex began I have always said it is essential that you work with reputable Forex brokers from a country that demands high industry standards for Forex firms.
On the other hand, the U.S. has tight industry standards and the strictest regulation for Forex firms. So does Canada, the U.K. Australia and Hong Kong. So if you have your account domiciled with any of these nations, you’re already ahead of the game. But beyond that you also need to find a reputable and well-capitalized firm within your country of choice.
I’ll repeat that: Place your hard-earned cash only with a firm that is highly regulated AND is well capitalized! These two points are extremely important.
In fact, I know of one firm that even displays their balance sheet directly on their website.
If a firm avoids strict regulations, then you don’t want to be involved with them. If they don’t “more than meet” the minimum capital requirements of these regulators, then you also don’t want to do business with them.
How to Tell Which Firm Is Worth Your Business
You can find out which firms are exceeding industry standards by visiting the regulator’s sites: www.nfa.futures.org and www.cftc.gov.
The CFTC and NFA can point you to a list that tells you exactly the amount of assets a firm has, and the minimum requirements each firm has to meet.
Don’t get involved with a small firm or an unregulated or loosely regulated firm. As I said before, regulators in the U.S. U.K. Canada, Australia and Hong Kong are tough. If your firm dodges these places, there’s a reason.
If your firm welcomes regulation, and strives to exceed minimum capital requirements that the NFA and CFTC set forth, then you are probably with a firm that’s worth your time.
Avoid Scammers and Choose Legitimate Forex Products
We’ve seen how to avoid less-than-honest Forex dealers in your trading.
And for certain, choosing a reputable Forex dealer is very important. But in addition to choosing a legitimate dealer to broker your trades, you also need to be certain you’re using legitimate money managers and automated platforms, if you decide to go that route in your trading.
So how do you do that? Well, basically, it all comes back to that old saying “buyer beware.” Like in any other market, if any Forex products or managers sounds too good to be true, they probably are.
Outrageous Profits? Don’t Believe it.
Specifically, be aware of what any potential money manager or automated trading robot (expert advisor) is promising you. Take a look at their advertising: Do they claim they can produce these returns with NO potential for losses? Do they advertise enormous, outrageous gains? If so, be cautious.
Lately, there has been one that goes so far as to say it’s never had a losing trade and that it can earn 20,000% a year (No, that’s not a typo – 20,000%.).
Ridiculous! Don’t be suckered in. If we could all earn 20,000% and never post a loss, then we could all be filthy rich in no time. In fact, why would anyone have to have a job? We could all buy these trading robots that cost US$100 to US$300 and never have to work again!
It’s crazy, yet wannabe traders actually buy into these types of scams. I hate to see so many people getting cheated that way.
Outlandish Promises? Move Past Them
Legitimate money managers and automated programs will state there will be losses and usually give you examples of draw downs that they’ve had in the past. They don’t tell you you’ll be a millionaire real soon.
So be careful who you trade with and be equally as careful as to whom you trust to manage your Forex money. Remember, if you’re promised the moon without any margin for error, then it’s probably too good to be true.
I want you to know I personally trade the Forex markets and I have an account at a Forex firm to facilitate that trading. So I can attest that the Forex market as a whole can be as legitimate as any out there. In fact, the Forex market is so huge, with such a large trading volume every day, that it’s almost impossible for a corporate-type, or CEO scandal to upset this market, as you might find in stocks.
I don’t want to scare you away from Forex trading, especially now that many of the old problems are no longer in existence. Many Forex firms that used to cheat have now reformed and voluntarily placed themselves under regulation. Still, I want you to be cautious when you’re choosing how you’re going to trade this market, so you can avoid a bad experience right from the start. And above all, realize that the regultion over Forex firms is there only to the extent that they meet capital requirements. They are not regulated in any way approaching the regulatons in the futures markets.
Forex drokers can deceive you about there being no commissions. $30 minimum/round turn (called the spread) is in reality a commission that eats up your capital at an astonishing rate. Even winning traders lose money and end up with negative results because of this outlandish overhead.
Trading futures, you should never have to pay a broker more than $5/round turn, and almost always even less than that.
Guaranteed fills. True but… The only way a dealer can
guarantee fills is for the dealer to become the buyer or seller of last resort. That means the dealer is running a bucket shop. All Forex dealers are the buyer and seller of last resort. If the broker claims to not have a deal desk, then the bank is the buyer and seller of last resort. The banks are unregulated when it comes to trading Forex.
Brokers do not all tell the truth about volume. They tell you about the volume for all Forex trading, which doesn't even come close to the volume they truly have at their own brokerage, which is where you are trading. Volume in currency futures is higher than the volume traded at any single Forex broker, often greater by a factor of ten.
Leaning. Brokers say they are charging you a 3 pip spread to trade the popular currency pairs. But in reality, a broker may be making as much or more than 10 pips on your trades. He does this by skewing prices. Since you are not trading at an exchange, the broker can feed you any price he wants to feed you. He can buy at the bank for perhaps 7 pips less than he sells to you. He then charges you 3 pips for the privilege of being ripped off, for a total of 10 pips. No one knows the true price of a currency traded in Forex. Forex pricing does not guarantee you true price discovery, nor does it guarantee an efficient market. Leaning is especially true for mini and micro Forex accounts. Since the banks deal only in full size contracts. the dealer has to break those contracts into smaller lot sizes in order to offer you a minii or micro Forex contract. Doing so leaves them a lot of room to cheat.
Unregulated. Forex may sound like an exchange, but it isn't. It exists entirely in cyberspace, with every broker and every bank having different prices for any particular currency. There are some financial requirements for dealers who register with the CFTC, and the NFA, but that regulation doesn't even come close to the regulatory requirements for a futures broker. Forex dealers do not have to mark to market each day as do futures brokers. If your Forex dealer files for bankruptcy or absconds with your money, you have zero recourse.
No guarantee. If a Forex dealer does go out of business, you could lose all your money. There are no guarantees, and no one standing behind it. Futures brokers are required to mark to market at the end of every session every day. They have to put up cash to cover every open trade on their books. Futures brokers have gone broke, but no futures customer has ever lost one cent of the money in his trading account because of a failed broker. Nor have they had to wait for their money. It is immediately available.
You can get exactly the same action in the euro fx futures as you get in the "Euro" Forex. Commissions are as low as one tenth per round turn, depending on volume, through a regulated broker, trading electronically at an exchange where you know the true price of the currency. Knowing the true price of anything is called "price discovery." Futures markets give you greater efficiency than do Forex markets. Futures trades move more money than do Forex trades. The contracts are larger, and a tick is usually worth more than a pip.
What is the true price? A Forex dealer can only give you the price of a currency as quoted to him by the bank through which he trades. Banks have differing prices for a currency. You never know what the real price is because there is no central exchange through which all prices flow. Therefore, there is no transparency. Besides not knowing the true price from the bank, you can also be deceived by "leaning" or "skewing" of the real price at the bank. Forex dealers are known to lean the prices.
Forex dealers are not necessarily truthful. They lure people in with hype and false advertising: "No commissions!" "Guaranteed fills." "24 hour trading:" Who in his right mind is going to need to trade 24 hours unless he has a special need? While it is true that total Forex volume is greater than in the futures, futures volume at the exchange is greater than the volume at a Forex broker for the most popularly traded currencies. What most traders don't realize is that the vast majority of Forex volume is traded directly between banks, and that great volume is never seen at the retail dealer level. The only place where the liquidity differential matters is in currencies like the Mexican peso, the Brazilian real, and somebody's krone. Those thinly traded currencies may be more liquid in Forex. But if you trade anything but the few most liquid and popular currencies, you are going to be paying at least 5 pips, and often more. Unless you have a particular commercial need to deal in Polish zlotys, Indian rupees, or some other thinly traded currency, you don't need Forex.
You are told by Forex brokers that there is little or no stop running. This is one of their biggest and boldest fabrications. The truth is there is far more stop running in Forex than in futures. I have friends who work in Forex as well as many traders who of necessity have to trade Forex. More than one of my students is a market maker in Forex. These are people who should know, but in case you don't want to believe me or them, simple observation of Forex trading will reveal the vast amount of stop running that takes place there. Who is it that runs the stops? It is your friendly Forex brokerr as well as your friendly Forex banker. They both have a vested interest in seeing to it that your orders are filled. Stop running is nothing more than order filling. The brokers and bankers see to it that everybody's order gets filled. but with how much slippage.
Probably you have heard that if you win regularly in Forex, you may be barred from trading. Is this true? Yes it is with some of the bad brokers. The fact that it is true is just another proof that when you trade Forex, you are trading at a bucket shop. In the book, "Reminiscences of a Stock Operator," we are told that Jesse Livermore was banned from trading at certain stock brokers because they couldn't stand his beating the house. The same thing is true with many Forex brokers. Since they are the ones guaranteeing you a fill, they are in effect the buyer and seller of last resort. The truth is that most Forex brokers have precious little liquidity at their firms. In order to give you the impression that there is liquidity, it is the dealer who gives you your fill. It is the dealer who does the stop running that supposedly doesn't exist in Forex. But if you are regularly beating the socks off the dealer, he will ban you from trading at his firm. This can happen even when the dealer claims to not have a deal desk.
Is there hope for a trader who wants to trade Forex? Yes there is.
If you have a need to trade any of the exotics, it is not practical, and may very well be impossible, to trade them in the futures markets. Also, if you insist on trading Forex with a small amount of money, you will have to trade in the Forex markets. I refer here to mini, micro, and nano accounts.
You can post further comments and questions regarding this article in our educational discussion board for Currency Trading / Forex: http://tetradersforum.com/forum/
Having given you the real information about Forex, I want to make sure that you understand that Trading Educators is here to help you to properly trade Forex, if that turns out to be your decision. Towards that end we offer a Forex advisory, a highly successful Forex trading method (Ambush), an e-book on how to day trade Forex, a Forex seminar . and private tutoring in Forex trading.