Finance Blog

The Difference Between Forex and Futures Trading

A “tradable account” is referred to as a spot account because it allows the trader access to outright speculation on the price action of Currency Pairs. It can be used by anyone wishing to speculate or hedge their existing positions in any other asset class (allowing you, for example, to use an FX account as part of your spread betting strategy). The trader can deposit funds and buy and sell currency pairs based on expected future exchange rates (in the hope of making a profit). Spot trading means speculating on changes in short-term exchange rates.

A “Margin account” is more geared towards the investor who wishes to invest for the long term. The trader can deposit funds and buy and sell currency pairs based on expected future exchange rates (in the hope of making a profit). Margin trading means taking leveraged positions in spot FX, which gives you buying power, allowing you to speculate or hedge your existing positions in any other asset class. For example, if your margin account has a 10% capital requirement, then equity worth 10% of your total exposure must be deposited before placing a trade

What is Different Between the Two?

Positions

The main difference between the two types of accounts is that in the case of futures trading, traders are obligated to keep their positions open until predetermined delivery dates. This means that futures traders cannot close out their positions before the delivery date without taking on a substantial loss (known as “bearing the mark to market”). With forex trading, positions can be opened and closed at will because they merely speculate on future exchange rate movements.

Fees

Account setup fees differ. You do not have an account setup fee associated with account creation; futures trading does carry an account creation cost with spot Forex trading. However, you should note that this cost gets deducted from your first deposit into your brokerage account (so there is an indirect account opening cost). Also, in the case of a spot Forex account, there may be a minimum amount that you must deposit before opening an active trading account.

Additionally, futures accounts carry a small monthly fee for ‘booking’ purposes (i.e., holding positions open overnight). In contrast, no such fee exists in the case of forex trading accounts because positions are free to close whenever they wish. There is also a daily funding charge when you hold your position open overnight in the UK market. Most well-known brokers will have this charge included in their dealing spread and have reasonable rates to avoid an issue.

Block Market Trading Hours

If you are trading in the UK, there are certain trading hours to be aware of when it comes to both types of accounts. With futures accounts, traders place their orders during continuous trading sessions between 8 am and 4 pm London time. You cannot access or close out your position before or after these set times unless you are prepared to take on the additional risk associated with intra-day price fluctuations. Conversely, spot Forex traders can still conduct business 24 hours a day because their positions can be closed or opened at any time during the trading session. There is, however, a three-hour daily closure from 5 pm to 8 pm London time.

Settlement

As far as futures accounts are concerned, settlement occurs every Friday evening via a process known as “marking to market.” In other words, the gains and losses incurred by holding open positions during the week must be recorded by both brokers and traders before trading recommences on Monday morning. In contrast with spot Forex transactions which only require payment for purchased currency when your order is filled (i.e., when you buy).

Regulation

Concerning forex trading regulation in the UK, there are no formal rules or regulations in place. However, the Financial Conduct Authority (FCA) does provide a degree of legal protection to retail investors because they must adhere to specific rules when trading online in the UK/EU. For example, brokers in the UK cannot allow traders to lose more than their initial deposit in a single trade.

In contrast, futures contracts are subject to strict regulatory oversight from FINRA and the Commodity Futures Trading Commission(CFTC). In other words, futures traders have far more legal recourse if something goes awry with their trades than spot Forex traders do under US law.

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