These days traders have so many choices in terms of what instrument they want to use to express their opinion in the markets. There are mini futures, cfds,spot, ETFs, and regular futures contracts not to mention traditional stocks and bonds. So spread capital amongst all these products and combine that with a general lack of trust from the general public and it’s no wonder why we get such indecisive convictionless markets these days. When it comes to forex trading, people are faced with two particular choices: spot or futures?
Before a newer trader can effectively choose such a product, it is very important to know the difference between the two. The primary difference is the spot market is over the counter while the futures market is conducted through a central exchange. On the surface, this may not mean much to newer traders but this choice can have a major effect on the type of strategy that you choose to employ. For example, if you intend to be a scalper or a very short term momentum trader that trades frequently, your average retail forex broker account will not be the best choice. Why? the spreads and conflict of interest put you at a great disadvantage, and the market is already tough enough, you don’t need any additional obstacles. An ECN or the futures would be a more appropriate choice.
One of the reasons why I think this choice is less obvious to the new trader is as soon as they look into opening a futures account, they see that the margin requirements are greater (less leverage) and the contract sizes are bigger which means less flexibility and more risk which is usually inappropriate for small accounts.
Now if your intended strategy calls for larger time frames and you require much less precision then a retail forex and/or cfd broker will be just fine and you can enjoy all the flexibility that comes with such an account.
Why are futures contracts and ECN active trader platforms better for scalping? Liquidity is not coming from a single source provider such as a dealing desk. These markets are more natural and are mostly free of conflict of interest. Just make sure you have the risk capital and experience to trade at this level.
An experienced forex trader knows that there are strategies that are better applied in the spot market, and strategies better applied in the futures market. There are even mini futures available today that are not as liquid but offer the flexibility of the spot market without the problems that come along with a dealing desk broker.
As a newer trader you definitely should take the time to learn about the instruments that are available to you and how they work exactly. As you gain experience, you will be much better prepared to move forward with your strategies.
Marc Principato, CMT
*No Relevant Positions