Futures vs. Forex (2023): Differences Explained w/ Examples (2024)

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Were you negatively affected by the COVID-19 pandemic?

The majority of people around the world will quickly answer “yes”. ✅

Many stayed inside and searched for ways to provide additional income. That’s when trading futures started to become trendy.

In reality, $100 billion of currency futures are traded per day. But that’s still peanuts compared to forex, which has over $6 trillion per day in trades. And interest in forex trading continued to soar in 2020 as forex brokers had record numbers of new clients.

Both futures and forex can seem abstract and therefore hard to even grapple with. But as we go through and explain each of them, you’ll find out they really aren’t so bad. In fact, both forex and futures are pretty darn easy to understand.

That’s exactly what we’ll cover in this article as we take a deep dive into these two forms of trading. Yes, you’ll become a pro in both forex and futures! Okay, so maybe you won’t become a pro in either, but you will definitely learn some of the basics as we work to demystify both of them.

It’s also possible to trade forex futures. So while forex and futures usually aren’t the same thing, they sometimes come together in a beautiful marriage of assets. We’ll break down all this and more in this article, so read on if you want to find out what the deal is with futures and forex.

How Forex Works 🏗

Forex might seem complicated for beginner forex traders, but it’s actually similar to buying something from a store: you exchange one thing for another thing. If you want to buy the new iPhone, you have to exchange your dollars—with a store—for the phone.

In the case of forex, you trade one country’s currency—with a broker—for another country’s currency. If you are buying, you will pay the broker’s ask price, and if you are selling, they’ll pay you their bid price. Easy peasy, right?

When trading forex, you deal with currency pairs, meaning currencies from two different countries. Here are some common examples:

You might notice that USD is a part of all of these pairs—this makes sense since USD is involved in over 90 percent of forex trades. While the top forex brokers in the U.S. will likely use exchange rates similar to what you can find on live exchange rate websites, their ask prices will always be higher than the bid. They have bills to pay, after all.

Depending on the currency pair, the difference between bid and ask (called the spread) can be small or it can be large. For major pairs, such as EUR/USD, the spread is likely to be small, while it may be large on exotic pairs.

How Futures Work ⚙

Futures, also called futures contracts, are agreements that obligate parties to trade assets on a predetermined date and price. In other words, it’s like agreeing to buy that iPhone in the future for a set price instead of buying it today. If you could actually wait, anyway.

Futures are a kind of derivative, meaning they are a contract between two parties whose value is based on underlying assets. The assets that are traded with futures contracts can vary widely, such as:

• ☑️ Gold, crude oil, and wheat
• ☑️ Currency futures (including Bitcoin and other cryptocurrencies in some cases)
• ☑️ Stock index futures
• ☑️ US Treasury bond futures

Though the futures market isn’t quite as large as the forex market, it still has significant trading volume, with about $100 billion daily. Futures can be used both by companies as a hedge against price volatility and by investors who speculate about future price changes.

Many factors influence futures prices, including supply and demand, liquidity, and the global economy as a whole—even droughts and climate change can affect futures prices. So if you want to be one of the cool kids who trade these contracts, you’ll have to be aware of the recent developments around whatever you are trading.

It’s also important to note that price increases are not guaranteed. Some assets may steadily increase in price, but some can decrease over long periods of time. Therefore, signing a futures contract is no guarantee you’ll be able to buy that thing at a discount.

Trading Currency Futures 💹

Just like other types of assets, currencies, too, can be traded with futures contracts. Currency futures are useful in a number of scenarios, such as for hedging and for price speculation. The latter is how people make some serious cash.

Unlike currency forwards, currency futures are traded on an exchange. Each currency future has a corresponding symbol on the exchange.

Much like forex, you will need to leverage the advantages offered by the top futures brokers if you want to trade futures. Futures trading doesn’t have a $25,000 minimum equity requirement like stock day trading does; you only need enough equity to cover the margin on your contracts.

This can vary, though—some brokers require you to have equity greater than the margin mentioned in the contract. Therefore, it’s a good idea to look into a few different brokers and see which one is the best fit for you.

Currency Futures Example 📝

Let’s be honest: futures contracts are a bit abstract, which can make them seem confusing. But they actually aren’t too difficult to understand. To illustrate, consider a simple example:

Imagine the price of the new iPhone is $750 today and you agree to pay that price in the future. By the time the contract expires, the price MSRP has increased to $1,000. But since your contract was for $750, that is the price you pay.

Of course, there aren’t any futures contracts for iPhones (if only!), but that’s the gist. Currency futures work similarly, except that you agree to purchase a set amount of one currency for a set amount of another currency on the expiration date.

So, if the current EUR/USD price is 1.20, you might agree to purchase 100 Euros for $120 in the future. Even if the exchange rate increases to 1.30, you still pay $120 per contract.

Test your knowledge: QUIZ! 🙋

The standard for one Euro future contract is 125,000 Euros. An American company called ABC Company buys one Euro future at a rate of EUR/USD = 1.22. The contract expires in three weeks, and ABC lets the contract expire. On the expiration date, the EUR/USD rate has risen to 1.25. How much does ABC pay?

💬 Answer: 152,037.50. (125,000 * 1.22). The truth is that we gave you the 1.25 rate just to throw you a curveball. Even though the exchange rate did rise by the expiration date, ABC pays the 1.22 exchange rate because that is the price in the futures contract.

Differences Between the Forex and Futures Markets ⚖️

The differences between forex and futures are not huge, but there are some points worth considering. Here are a few of them:

1. The Futures Market is Centralized 🎯

One key difference between forex and futures are the prices traders see. Forex traders are traded on the centralized Chicago Mercantile Exchange (CME), which means all traders can see the exact price at which each contract is trading.

Forex is different because all trades go directly through brokers. While there are websites that have spot forex exchange rates, such as WM Reuters, you don’t see complete data there. The data you see is a sampling of real trades, but not every trade is captured.

2. Futures Contracts Tend to Have Lower Margin Requirements 📜

Note that when we say futures have a lower margin requirement, we mean the percent of equity you have in the transaction. In other words, the dollar amount will vary based on what is being traded, but futures contracts often allow you to leverage a greater percentage of the trade. In other words, futures allow you to turn a bigger profit with less starting capital.

To clarify, we say “often” because each broker has its own requirements. Thus, the broker you choose also influences how much you are allowed to leverage. So, make sure you pick a good one!

3. Forex Has No Expiration Date; Futures Expire Every 3 Months 📆

All futures contracts have expiration dates, but that date isn’t set by the broker. Instead, each type of contract has set expiration dates throughout the year (usually four or more of them). Contracts can be traded for a specific amount of time before they expire.

Barchart is a good site for futures contract expiration dates. As you can see, many asset classes are found here, including “softs,” which are things like cocoa, coffee, and sugar. In other words, the essentials.

Trading Currency Futures vs. Forex 💱

Trading currency futures and forex each have their own set of benefits and challenges. Of course that is true, or everyone would just trade one or the other, right?

The biggest difference between trading currency futures and trading forex is what you are trading. In the spot forex market (literally, trading on the spot), you usually just trade one currency for another right then and there. But with currency futures, you trade a contract to make a future purchase.

In practicality, one big difference when trading futures contracts is that they are more speculative. For example, someone going on a vacation to a foreign country and just needs money to buy food and other things probably wouldn’t deal in futures contracts—though stranger things have happened!

Let’s go over some of the specific benefits of trading each.

Currency Futures Advantages ⭐

• ☑️ Transparent pricing. Because futures are traded on a centralized exchange, you know exactly what the price is for each type of currency.
  
• ☑️ Avoid hidden fees. The spot forex spread can have hidden fees built in. But futures brokers don’t make money this way, so you won’t have these hidden fees with futures.
  
• ☑️ Very little counterparty risk. Counterparty risk is the risk that one party won’t hold up their obligation to the contract. Because futures contracts are traded on a centralized exchange, it’s easier to ensure all parties uphold their obligations.
  
• ☑️ Stronger regulation. Futures are traded on the CME, which is regulated by the U.S. Commodity Futures Trading Commission (CFTC).

Currency Futures Disadvantages ⚠️

• ☑️ Not a 24-hour market. The currency futures market sometimes closes, such as between 5 p.m. and 6 p.m. Eastern.
  
• ☑️ Fewer markets and fewer brokers. It’s always good to have more choice, and futures get the short end of that stick.
  
• ☑️ Lower liquidity, especially when trading after hours. Liquidity is essential to turning a profit in futures; that happens when traders exit their positions.
  
• ☑️ Some exchanges have maximum price fluctuations. Good for stability, less good for traders.

Spot Forex Advantages 🌟

• ☑️ Fast order execution. Especially with online brokers, orders can be fulfilled immediately.
  
• ☑️ 24-hour trading. Forex is traded around the clock due to the fact that it deals with currencies around the world.
  
• ☑️ High liquidity. Trillions of dollars are traded every day on the forex market, and all of those trades are executed in cash.
  
• ☑️ Leverage. Leverage allows you to trade up to 500 times your equity in the spot forex market.

Spot Forex Disadvantages 🚧

• ☑️ Not centralized. Not being centralized isn’t necessarily a disadvantage on its own, but it leads to other issues, such as…
  
• ☑️ Not regulated. The spot forex market isn’t regulated. That means there is no governing body that prevents price manipulation or other unscrupulous trading practices.
  
• ☑️ Risk of hidden fees and unfavorable spreads. If you see a forex broker in a dark alley, you might want to run away. Spot forex brokers make money on the spread, and this can lead them to offer unnecessarily large spreads on exotic pairs or include hidden fees for smaller spreads. If possible, make sure you avoid outright scams in the forex market.

What You Need to Start Trading 👨‍🏫

Getting started trading forex or currency futures can seem overwhelming, but it doesn’t have to be. Here are a few steps you can take to get started:

1. Research investments. Forex and currency futures literally open up an entire world of possibilities. There are currency pairs found all over the globe and many types of assets traded with futures contracts. You’ll have to decide whether to trade forex or futures, then decide which type(s) to trade.
   
2. Gather some starting capital. Whether you trade forex or futures, you’re going to need some capital to get started. If you trade forex, you should have at least a couple thousand dollars to start. Some forex brokers require at least $10,000. Still, this is considerably lower than the $25,000 requirement to day trade stocks.
   
3. Find a broker. Pretty straightforward here. If you want to trade forex or currency futures, accept nothing less than one of the top forex brokerages or futures brokers.
   
4. Choose a trading strategy. There’s no shortage of strategies for trading forex and futures trading strategies. There’s no “best” strategy; the key is finding the one that works best for you.
   
5. Be disciplined. Trading any kind of asset isn’t easy. It takes discipline, practice, and patience. If you are frustrated by your trading experience, you can try a different strategy, but eventually, you’ll need to settle on a plan—and stick to it.

Trading Futures and Forex During COVID-19

Unsurprisingly, COVID-19 has led to increased volatility in numerous markets around the world. Although unemployment has increased in many countries, those who have the financial means and are stuck at home have turned to trading.

That has led to many opportunities, particularly in the spot forex market. In fact, all signs point to a healthier forex market than ever during these crazy times.

Forex brokers have reported record volumes and thousands of new clients as traders look to take advantage of the increased volatility. While there has been an unprecedented opportunity in the forex market during COVID-19, some traders have experienced significant losses due to over-leveraging—these are usually inexperienced investors going for risky trades.

As for the futures market, there are definitely opportunities in quite a few sectors. But since there are many different types of futures contracts, some are faring better than others. For example, Dow Jones, Nasdaq, and S&P 500 futures have seen modest growth as of late.

Meanwhile, futures in cryptocurrencies are seeing huge jumps as of late; ether futures recently saw a 7.3% increase in just 24 hours. Because of the growth spurt cryptos have seen lately, futures traders world-round are seeing investing in Bitcoin as a very profitable venture.

Conclusion 🖊️

Both forex and currency futures are useful assets that also provide a number of opportunities for traders. Whether you want to buy forex or currency futures, you will need to work with a broker. That being said, currency futures are traded on a centralized exchange, while forex is not.

However, both forex and currency futures have standardized symbols. Forex always comes in pairs, such as EUR/USD or NZD/USD. On the other hand, currency futures always start with a 6, such as 6E, 6B, or 6J.

Both forex and currency futures can be used for speculation or for more specific purposes. You need forex when traveling to another country or when companies in different countries do business. Companies can use currency futures as a hedge against exchange rate changes.

Both forex and currency futures can be speculative, too. Both can be a good way to turn a profit, depending on your trading strategy.

Start Trading with a Forex Broker

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All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.