FOREX OR FUTURES – WHAT IS BETTER FOR DAY TRADING?

Often new traders entering the stage of day trading first get in touch with forex. Event though there are also forex futures available, most people refer to CFDs (contract for difference) when talking about forex. Therefore, this article takes CFDs as the underlying instrument for forex.

Futures play a less dominant role among beginners but provide additional tools of analysing and reading the markets than forex CFDs. The below article shall illustrate the differences between forex and futures as well as the advantages and disadvantages of the respective trading instrument.

In order provide an overview of the potential returns, the below table illustrates the result of the yearly trading championship. It is differentiated between futures and forex while illustrating significantly differing results in the trader’s performance – the second in forex trading would not even have been among the top 5 in futures trading.

Top 5 Performance of the WCTC in Futures and FX

This significant difference in performance was not only this year but was also demonstrated the years before which let one ask for the “why?”.

 

Futures

Futures are traded at public exchanges like the CME (Chicago), CBOT (Chicago) or NYMEX (New York) for example (CME Group, 2020). Market participants from all over the world are trading based on supply and demand. Futures traders can utilise various tools that reflect the participant’s trading activities through different kinds of order flow charts, the volume profile, the market profile and the actual order book (Sierra Chart, 2020).

In order to participate in the futures markets, a trader needs an account with a futures broker, a real-time data feed and a trading software. In addition, trading futures requires a margin which differs with regards to the respective instrument – there are mini futures available and, recently, also the micro futures markets are growing enabling traders to participate the futures markets even with small accounts (Reuters, 2019).

 

Forex (CFDs)

In contrast, forex is traded OTC (Investopia, 2020) and, as a result, every broker has slightly different prices and, consequently, slightly different charts. A trader never knows where the real price is currently trading. Also, the only market participant a trader trades with is the forex broker itself (SEC, 2018). A trader always sells respectively buys from the broker which implements a potential conflict of interest (BaFin, 2019) - every time the traders wins the broker loses and vice versa.

Where the CFD provider is a full or – as is usually the case – a partial economic counterparty to their client, there will be a conflict of interest if the CFD position opened by the client generates risk exposure for the CFD provider.” (BaFin, 2019)

Since the only market participant is the broker (SEC, 2018), there is no volume or order book available and, thus, far less information available than with futures. Also, the broker can exactly see where the stops are placed and due to the conflict of interest has a motivation to trigger those stops (Wikipedia, 2010).

There has also been some concern that CFD trading lacks transparency as it happens primarily over-the-counter and that there is no standard contract. This has led some to suggest that CFD providers could exploit their clients. This topic appears regularly on trading forums, in particular when it comes to rules around executing stops, and liquidating positions in margin call. (Wikipedia, 2021)

Forex CFDs are popular among retails traders with small accounts due to the comparably low entry barriers. In order to participate in the forex markets via CFDs, a trader only needs to open an account with a forex broker and is ready to trade. No data feed and no additional software is required necessarily. Also, there is very little capital required to trade forex.

Résumé

Even though both instruments, futures and CFDs, illustrate their pros and cons the futures market clearly dominates the positive side. Despite the slightly higher entry barriers, the futures markets provide transparency and professional trading tools to analyse the market in depth.

Due to the lack of transparency and missing trading tools, no professional institution, whether it is banks, hedge funds or proprietary trading companies, is trading forex CFDs – they all trade futures.

Experienced traders know about the advantages of futures and spectrum of the available tools such as order flow charts, volume profile or market profile. They understand how the market making works in the futures and CFD markets and, therefore, clearly prefer futures.

To sum up, the futures market provides the better opportunities for day traders and, as a result, there are significantly more successful traders in the futures markets than in the forex market. Also, the potential profit is significantly larger with futures than with CFDs.

Sources

AMP Futures (2021). Margins. Available at: https://www.ampfutures.com/trading-info/margins/ (Accessed 30 March 2021)

BaFin (2019). General Administrative Act pursuant to Article 42 of Regulation (EU) No 600/2014 (MiFIR) regarding contracts for differences (CFDs). Available at: https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Aufsichtsrecht/Verfuegung/vf_190801_allgvfg_Differenzgeschaefte_en.html (Accessed 30 March 2021)

CME Group (2021). CBOT. Available at: https://www.cmegroup.com/company/cbot.html (Accessed 30 March 2021)

CME Group (2021). NYMEX. Available at: https://www.cmegroup.com/company/nymex.html (Accessed 30 March 2021)

CME Group (2021). CME. Available at: https://www.cmegroup.com/company/cme.html (Accessed 30 March 2021)

CQG (2021). Exchange Connectivity. Available at: https://www.cqg.com/partners/exchanges (Accessed 30 March 2021)

CQG (2021). Global Data and Exchange Connections. Available at: https://www.cqg.com/solutions/market-data (Accessed 30 March 2021)

Investopia (2020). An Introduction to Contract for Differences. Available at: https://www.investopedia.com/articles/stocks/09/trade-a-cfd.asp (Accessed: 30 March 2021)

Reuters (2020). Why Micro Contract seeing Global Adoption. Available at: https://www.reuters.com/article/sponsored/micro-contracts (Accessed 30 March 2021)

SEC (2018). Case 1:18-cv-02244. Available at: https://www.sec.gov/litigation/complaints/2018/comp-pr2018-218.pdf (Accessed 30 March 2021)

Sierra Chart (2021). Futures Order Routing Service with Data. Available at: https://www.sierrachart.com/index.php?page=doc/SierraChartOrderRoutingServiceWithData.php (Accessed: 30 March 2021)

WCTC (2021). Current Standings. Available at: https://www.worldcupchampionships.com/world-cup-trading-championship-standings (Accessed: 29 March 2021)

Wikipedia (2021). Contract for Difference. Available at: https://en.wikipedia.org/wiki/Contract_for_difference )(Accessed 30 March 2021)

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