The difference between forex and futures trading in the UK is rooted in regulation. Futures contracts are standardized agreements to buy or sell a particular commodity at a specific time for an agreed price. These instruments don’t involve cash payments until ownership changes hands, instead of spot forex, where trades are conducted over-the-counter and settlement takes place immediately via a cash payment. European futures exchanges trade agricultural commodities such as sugar and coffee alongside currencies, interest rates and stock market indices.
The difference between forex and futures trading is that the former allows for international trade to take place without a physical exchange of any kind, while the latter has been developing from an ancient tradition in which merchants settled their accounts at a fixed time.
Forex and futures share similarities because both instruments track changes in the underlying markets they represent. However, they differ notably when it comes to regulation, market access, liquidity, and settlement times. Although this article focuses on differences between UK-based forex and futures trading in the Forex vs Futures Trading in The UK, traders can apply this information to any country with futures exchanges.
Here are some key factors to consider before investing in futures
Few futures contracts will be traded over the counter because this is a highly risky form of trading. The vast majority of traders who buy and sell derivatives do so through regulated exchanges, which protect from counterparty risk – the danger that one party will default on their side of the deal.
Guaranteed by clearinghouses
Unlike ‘over-the-counter’ trades where all aspects are agreed bilaterally between buyer and seller, exchanges have strict rules about what information parties must disclose before a trade occurs. Clearinghouses also guarantee Exchange-traded transactions if one side of the trade goes bust.
One advantage of futures trading is that it can be traded 24 hours a day, but there are only six sessions when spot forex markets are open – 10:00 p.m. GMT Sunday through to 10:00 p.m. GMT Friday.
Futures trading is more heavily regulated than forex in the UK. While investment in most types of foreign exchange dealing carries risk, only some products entail strict regulation – including CFDs and spread betting.
Here are some key characteristics of forex trading that all investors should note.
Immediacy allows for speculation.
In forex trading, currencies are bought and sold for immediate delivery at a price set by a live dealer market in a foreign exchange (FX) trading platform. Many forex brokers offer speculative contracts for difference (CFDs), which allow traders to speculate on the price of currencies without having to exchange them.
All types of derivatives trading are highly leveraged, meaning you can lose all of your capital very quickly if your trade moves against you or you mishandle your margin. Trading on an MT4 requires no initial deposit but allows for 100:1 leverage (although clients with at least $50,000 available funds get access to 200:1). Indices allow for even greater leverage.
By contrast, futures exchanges set margin requirements that may be as low as 2% on some contracts. Of course, some forex brokers offer no margin on futures contracts (e.g., IG) but charge the total transaction costs on each trade. Plus, if your trade moves against you, you’ll be liable to pay any losses on top of the original price of the contract (unlike future trading).
New investors can learn about and practise both types of trading with demo accounts before putting money on the line with live trades. That said, it’s not just new traders who should use these tools, experienced investors can also benefit from using demo or practice accounts to back-test their strategies over historical data without risking real capital. It is recommended to use reputable online brokers from Saxo Bank, who offer the lowest commissions and excellent customer service.