Instead of using a formal exchange, forex market operators trade via electronic communications networks ECNs , dealing systems, phone, brokers, trading desks and online trading platforms. Forex market participants include major financial institutions, large corporations, hedge and investment funds, high net worth individuals and even retail forex traders. Traders agree to the terms of a spot forex transaction at the moment it occurs.
The most notable example of this is the U. Currencies trade in pairs, so when you take a forex position, you simultaneously go long one currency, while going short another. You can trade just about any currency pair in the Interbank spot forex market by contacting a market maker or dealing desk at a major financial institution. The currency pairs that retail forex traders can operate in are limited to those their online broker offers, however.
The dealing spread is the difference between the bid exchange rate and the offer exchange rate for a currency pair. You can save on transaction costs by selecting a counterparty that offers tight dealing spreads, although some online forex brokers will add a commission on top of the dealing spread, especially if you will be getting very tight dealing spreads directly from an ECN.
Many traders use stop-loss orders to limit their risk and liquidate existing positions to cut losses. Sometimes, your stop-loss orders are not executed at the level they were placed at, which is an undesirable phenomenon commonly known as slippage. If you plan on trading medium- to long-term strategies where you regularly establish positions for more than 1 day, you may have to pay rollover fees.
Depending on the currency pair and your position, you might either receive or pay out funds when your positions are rolled over. For example, if you buy a low interest rate currency against a high interest rate currency, you receive a payment of the difference in the 2 interest rates for every day you hold the position after the end of the U.
Currency futures are contracts where 2 parties agree to exchange a specified amount of 1 currency for another at an agreed upon exchange rate on a specific future date. The counterparties of the contract consist of the buyer who takes a long position in the currency pair, and the seller who holds a short position in the underlying currency pair.
Unlike the Interbank or retail spot forex market, currency futures trade on a centralized exchange where exchange rates are very transparent. Currency futures also have associated options contracts. Since currency futures and options trade in special margin accounts, you must establish a relationship with a futures broker to operate in these contracts.
Currency futures contracts can be traded out of before settlement occurs, so trading them does not necessarily entail going through the delivery process. If your account falls below any of the minimum margin requirements as a result of holding a futures position, a margin call is made to restore the margin account balance to the maintenance margin amount.
So that a position can continue to be held after a margin call, the account can generally be restored to good standing via a cash deposit, electronic bank transfer or a check by overnight mail for the amount of variation margin requested. The trader can also close out the position, sell other securities to generate cash in the account or take an offsetting hedged position in the market.
When trading in the spot Interbank or retail forex markets, you can usually specify the amount you wish to trade in very small increments. Currency futures typically have margin requirements that result in lower leverage ratios than those you may be able to use in the spot forex market. Trading currency futures can require more capital and cost more to trade on balance than a spot forex trade done either via the Interbank market or an online forex broker.
In addition, the time element involved in futures contracts since they have fixed future delivery dates that usually differ from the spot value date could add a premium or discount to the currency depending on the prevailing interest rate differential for the currency pair traded. Nevertheless, if you plan on taking long-term positions in the currency market, especially if you want to do so via options on futures contracts, and you have deep enough pockets to pay commissions, survive margin calls and trade in larger amounts, then currency futures might be a good fit for you.
Diversification using both currency futures and spot forex could seem like a viable strategy at first glance, although the majority of online retail forex traders will probably find maintaining both types of trading accounts unnecessary. Basically, they would need to justify the added costs and trouble of opening a currency futures trading account when they can far more easily operate in an online forex trading account.
The main potentially profitable trading strategy involving currency futures and spot forex is arbitrage, which is the simultaneous buying and selling of equivalent assets in different markets for a risk free profit.
Professional futures traders and financial institutions are generally much better positioned to operate in the 2 different markets as arbitrageurs than smaller retail traders. Furthermore, enough banks already engage in arbitrage to ensure that the 2 markets stay closely aligned in terms of pricing. Strategies that involve trading over-the-counter OTC options and options on futures may require a substantial amount of money to implement. Since only well-funded forex traders can typically qualify to trade OTC currency options, you might want to open up a currency futures margin account with a broker that lets you also trade options on futures if you wish to use currency options in your trading strategy.
This will also let you use futures contracts as a suitable hedge to adjust your risk. In the table below, Benzinga presents its picks for the best forex brokers for trading in the spot forex and currency futures market. Dealing spreads and commissions vary depending on the broker, so make sure you contact the broker for additional information on pricing and minimum deposit requirements for opening an account. Also, many brokers will only accept clients from specific jurisdictions.
CedarFX offers access to a wide range of tradable securities, including stocks, futures, major and exotic forex pairs, cryptocurrencies and more. Though CedarFX could introduce a few additional educational resources, the broker remains a unique option for traders invested in giving back. IG is a comprehensive forex broker that offers full access to the currency market and support for over 80 currency pairs.
The broker only offers forex trading to its U. Though IG could work on its customer service and fees, the broker is an asset to new forex traders and those who prefer a more streamlined interface. With a massive range of tradable currencies, low account minimums and an impressive trading platform, FOREX. This brokerage is headquartered in Dublin, Ireland and began offering its services in It offers multiple trading platforms and earns mainly through spreads.
Trading in the spot forex market entails buying one currency against another, while trading currency futures involves trading a derivative contract for delivery at a future date. If you want to trade exclusively in the forex market, then trading either in the OTC spot forex market or via an online forex broker would probably make more sense.
Basically, your choice depends in large part on your available trading capital, whether you wish to use options or plan on trading other assets in addition to forex pairs. Remember that while you can profit from spot forex and currency futures trading, you can also wipe out your entire account, especially if you take on leveraged positions.
The answer will probably depend on your available trading capital and if you want to trade options. If you just want to speculate on exchange rate movements, then online forex trading is an easy way to get started. If you are well capitalized and prefer to trade currency options, then using a currency futures account can make sense.
Even though the underlying currency pairs traded are the same, the brokers, the value dates and how you trade can differ considerably between these markets. Currency futures consist of exchange-traded derivative contracts on specific currency pairs with standardized future delivery dates, associated option contracts and typically rather large lot sizes. This contrasts to most online and Interbank forex transactions that trade for value spot business days and can generally be executed in more customizable amounts.
Read More. Forex trading is an around the clock market. Benzinga provides the essential research to determine the best trading software for you in Benzinga has located the best free Forex charts for tracing the currency value changes. Let our research help you make your investments. Discover the best forex trading tools you'll need to make the best possible trades, including calculators, converters, feeds and more. Compare the best CFD brokers to find which one is best for you. Choose from our top six picks based on platform, security, commissions and more.
Compare the best copy trade forex brokers, based on platform, ease-of-use, account minimums, network of traders and more. Ready to tackle currency pairs? Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand.
Table of Contents. Currency Futures. Spot FX. Key Differences. Currency Futures vs. Spot FX: An Overview The foreign exchange Forex market is a very large market with many different features, advantages, and pitfalls.
Key Takeaways A currency future is a futures contract stipulating an exchange of one currency for another at a future date and at a fixed purchase price. A spot FX contract stipulates that the delivery of the underlying currencies occur promptly usually 2 days following the settlement date.
The main difference between the contracts is when the trading price is determined and when the physical exchange of the currency pair occurs. Article Sources. Investopedia requires writers to use primary sources to support their work.
These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Spot Rate: What's the Difference? Partner Links. Related Terms.
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Cash Forex is the rate right now. A currency future is a futures contract stipulating an exchange of one currency for another at a future date and at a fixed purchase price. · A spot FX contract. Spot FX is the purchase or sale of forex 'on the spot', which means the exchange takes place at the exact point that the trade is settled. When trading spot.