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Futures Market vs. Forex Market

Let's get tomorrow out of the way and focus on today shall we? The forex market has other advantages over the futures market than just the ones we've discussed, and here they are...

[hidepost]Liquidity, there's real money in this forex market.

This is a big one because the forex market's so big. The futures market is only about $30 Billion a day, while the forex market is on the order of $1.5 Trillion a day. That's fifty times the liquidity, and that's a huge advantage.  Liquidity means when you want to sell, there's someone out there to buy.  You're not going to have to worry about getting stuck in a position because there aren't enough people out there to buy what you want to sell, or to sell what you want to buy. It can absorb any transactions the world can throw at it. Not so with futures.

You can't lose your shirt, just the sleeves.

When you open a position in the forex market, your available trading margin limits the amount of money you can lose. If your losses pass your available margin you'll get an automatic margin call that will close some or all of your open trades and use the results to cover the loss.

It's not fun, but it means you can't lose more money than you've decided to risk. Further losses are going to get cut off at the knees. This isn't the case in the futures market. In the futures market you don't know what you're going to lose until it happens, and if your position is liquidated at a loss, you're still responsible for the additional losses. There will be no margin call to get you out of this one.

Put No Stock in Stocks

Nobody to Get Between You and Your Trade

When you're dealing with a centralized market like the stock market, where traders may actually be physically present there's always going to be a class of "middle-men," who will get between you and your trade. This is not a good thing. Each layer that's added to the transaction brings its own cost in either money, time or both.

Their absence means faster trades at lower cost.

Fewer Onerous Regulations

One result of the Great Depression and the Crash of '29 was increased regulation in the equities market. One of those regulations prevented short selling unless there was an uptick, basically meaning you couldn't promise to sell some shares you didn't yet have and then go get them unless there was evidence the price was rising.

Because all forex trades are structurally identical, you buy one currency to sell another there's no advantage or disadvantage to going long or short. Any given currency can be falling against one currency and rising against a second. You can always make forex trades regardless of how the forex market's moving so you can't get into trouble the same way.

Size and Simplicity for the Win

Not only is the forex market bigger than its competitors, it's also much simpler than the stock market. Have you any idea how many stocks are traded on the NYSE? Thousands, and thousands more are traded on the NASDAQ. That's not including any of the other markets in other countries or the smaller markets in the US.

Those are a lot of stocks, and to succeed you're going to have to specialize because no one can keep everything in mind. Things will get lost in the details and a perfect opportunity can be missed just because you never hear of the stock and don't have the chance to jump on board.

Now compare that to the forex market. You've got four major currency pairs to keep track of. That's all. It's much easier to follow the forex market and far fewer opportunities are going to slip under your nose. It's also much easier to see patterns when there aren't so many stocks being traded that everything gets lost in the noise.

No Talking Heads to Ignore

You see it all the time. Insider trading scandals, analysts advising clients to buy stocks that are plummeting in an attempt to stem the fall for their real clients: the companies. Stockbrokers can't exist without the companies that trade on the market, and even when things are discouraged it doesn't mean no one will ever do them.

It's the kind of thing that's been on the news more times than anyone can count. Big business means someone is going to take little shortcuts for the company with an upcoming IPO that's going to make the brokerage house millions of dollars in commissions. Governments can make regulations all they want, reporters can uncover scandals all they want, but as long as people are human it can happen, and the market can get caught in the middle.

The forex market is immune to this; analysts are observers not actors on the stage. They can't drive things and so the forex market's left without this kind of interference.

Size Brings Stability

There's another problem with the stock market that the forex market doesn't share. Big players who can drive the market with what look to everyone else involved to be nothing but whims. A big fund can decide to buy heavily in one company, or divest another, and start the entire market on its way up or down. One decision by one person can set the stage for an entire day of trading, leaving everyone else to wonder what happened.

That's not going to happen in the forex market. With the vast size of the forex market not even central banks have enough influence to force the market one way or another indefinitely. It's not subject to being gamed in the same way. There are too many big players and the forex market itself is too big for anyone to be able to control it.

Now that you know the basics of forex trading, the next step is to go into the details: figuring out how to know when and what to trade not just how. In the next section we'll look at the basics of forex market analysis and then move on to charts.

Remember though, no trading with real money until you can demonstrate a regular profit trading with a demo account. Yes you'll lose money, but things will go a lot faster if you lose pretend money first.

Continue to CHAPTER 7 - HOW TO TRADE Now...

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