At the start of each trading session, you will receive an email with the author's new posts. You will see a lot of marketing materials out there explaining why the spot market is so much better and cheaper than the currency futures market, but how much of it is fact and how much is hype?
What are the real differences between these two closely related markets? Is it really cheaper to trade spot forex? This is an important topic because so many of the differences are related to trading costs, which is often a neglected subject among new and experienced traders.
When in doubt, check it out. Doing so will help us determine if either market really has an advantage. That is not actually true. Both currency futures and spot forex effectively trade hours a day, 5 days per week. The market is essentially closed from Friday afternoon through Sunday afternoon in North America. Currency Futures Contract spread in the currency futures market is not fixed. Depending on the liquidity of the market at the time, the spread can be one pip or less and an effective contract order may cut the spread to nothing.
In spot spot forex market, you can have a variable spread like this, which may widen with market conditions or a fixed spread, which spot not change but is usually wider pips on the majors on average than a variable spread. It is important to note that some spot dealers offer spreads on some pairs that are below one pip, but that forex not the case for all pairs they offer.
That is lower than the currency futures market by 0. However, they are showing an average spread of 2. On average, the spread in the futures market is narrower across the majors and major crosses than the spot market because the futures market has more liquidity and price competition than an individual dealer.
Spot Forex Spot forex dealers do not usually charge commissions. The spread is where they make their money, which is one reason it is a little wider on average than the currency futures market. Once commissions are added to the spread cost above, the advantages between currency futures versus spot forex become much closer to neutral. Spot Forex Spot forex dealers are extremely flexible on lot sizes.
This is great since a full K lot may be too large for many new traders. Some dealers will slice the contract sizes anywhere from 10,K to 1,K. The currency futures market generally has two contract sizes. A full-size contract is usually a little larger than the K lot in the spot market.
A mini contract, which is only available on some pairs, is usually about one half the size of a full-size contract. Larger lot sizes can make money management in a small account extremely difficult and may be the only clear advantage spot forex has over the currency futures market. Roll Over Interest vs. Currency Futures Because one of the ways a forex dealer makes money is by trimming the interest payment or increasing the interest charge on a particular pair, this premium tends to be a little higher in the futures contract.
However, the cost or benefit of this size is integrated into the price of the futures contract itself, which makes it harder to see at first glance. This difference also known as the cost of carry is forex by the value of the interest that will accrue between now and expiration.
By the time this contract expires, in 45 days, the futures price will equal the current spot price exactly. That means that if prices were held steady you size make the equivalent of 55 pips as the futures price came up to meet the spot size. Similarly, the charges for being on the non-interest paying side of the transaction is less in the futures market than with a spot forex dealer. Currency Futures Currency futures are exchange traded, which means that you can see order flow, volume, open interest and outstanding orders.
Forex dealers do not share that information, and because the market is so distributed, information available from any one dealer is probably not comprehensive enough to give a clear picture of what is happening in the market as a whole. Summary The fact that forex dealers will split up a forex lot into very small slices makes the spot forex market the hands down winner for small traders. Larger retail traders should seriously consider the futures market as an alternative to the spot forex market.
Trading costs are nearly identical, the exchange is more transparent, the product breadth is equivalent and interest is better. Every trader should realize that trading cost differences are not just limited to whether or not you are paying commissions. Trading costs include average spread, commissions and interest premiums or charges. When looked at together, these two markets look a lot more similar than you may have thought.
Will the OTC dealers win or will the innovations and size of the futures exchanges crush the remaining benefits offered by the spot dealers? Over the next couple of years, don't be surprised to see exchanges begin listing flexible spot contracts along side futures contracts. Information on these pages contains forward-looking statements that involve risks and uncertainties.
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You can trade through a Forex Futures account or a Spot Forex Account You will see a lot of marketing materials out there explaining why the spot market is so much better and cheaper than the currency futures market, but how much of it is fact and how much is hype? Filter by topic or author in Education Results.