Trading Futures FX Or Spot FX...What Are The Advantages/Disadvantages?

Are there any advantages or disadvantages to trading futures forex (FX) or spot FX? You may prefer one over the other, but let’s look at what makes them different.

Futures FX

Futures FX is an exchange-traded contract to buy or sell a specified amount of a given currency at a predetermined price on a set date in the future. See Investopedia. The contract is a legally binding uniform agreement to buy or sell a standardized foreign currency with a specific quantity, a set price and a set future date.

Spot FX

Trading any spot market usually means that it involves the actual exchange of the underlying asset similar to trading the commodities markets. However, just because you are trading spot FX, it doesn’t mean you are planning on actually exchanging currency, as most traders are speculators who close out their positions before settlement.

Biggest Advantage

The biggest advantage of Futures FX over Spot FX is that you’re trading on an exchange. If you are not trading on an exchange, you will have to deal with a broker. This can be like trading with FXCM or an ECN (Electronic Communication Network) type of Broker. FXCM stands for Forex Capital Markets and is a U.S. based Foreign exchange market broker. The company provides services through its own online trading platforms and other third party platforms. See Wikipedia or FXCM.

Contract Size

When you trade Futures FX, your lot will always be a set amount. If you are trading 6E, Euro FX, it will be 125,000. If you are trading 6A, Australian dollar, the lot size will always be 100,000. You can do 1,000; 10,000; 15,000; 30,000 or whatever size you want if you do Spot FX. You can do various sizes on Spot FX whereas on Futures you are locked into the size.

Interest Rate

Futures FX will include what is called carry interest rate. For example, if you are long on Australian dollar and short on the US dollar, you will collect interest rate on the Australian dollar and pay out interest rate on the US dollar. It would be collecting a little bit of carry interest over the course of every night. There would be a little bit of an adjustment to your position made or carry interest calculated in. With Spot FX, it is actually adjusted. For Futures FX, it is already built into the price.

Margin

Spot FX margin does not change from intraday margin to overnight margin. It stays the same. When trading Futures FX, you will have a varying margin. You will get an intraday break, basically around a 10:1 of what the overnight margin is, then it will go up at closing and you will have a holding margin.

Micros and Minis

Futures FX does offer micro and mini contracts, but they will have a lower liquidity, so you will pay a wider bid/offer spread. On top of that, you will have to pay a commission, so it does not behoove you at all to trade micro or mini future contracts on the exchange. You are better off to trade Spot FX. If you’re going to trade micros or minis, then go to Nadex, the North American Derivatives Exchange.

The end of day spread, that wider spread, will have about the same margin as Spot FX and you will not have to worry about interest rates. The bid/offer will be about a tick or two and you will not have to worry about flash crashes.

When you trade spreads on Nadex, your risk is capped. You can do different sizes and every tick is worth one dollar. Nadex and CME (Chicago Mercantile Exchange) are exchange based not OTC (Over The Counter).

Summary

As long as you go with a CFTC (Commodity Futures Trading Commission) regulated exchange or an NFA (National Futures Association) regulated Forex broker, either choice is a good way to go. Just be sure that you don’t go with an overseas broker! It all comes down to what you are looking for in your trading.

If you want the tight commissions on Futures, look for those benefits with low margins on NinjaTrader and at other brokerages. When day trading, 10 percent of initial margin is nice. This gives you a good summary of the pros and cons of trading Futures FX and Spot FX.

To further your trading education, visit www.apexinvesting.com.