Forex Market versus Futures Market

Forex Market versus Futures Market
It may seem strange to compare the Forex market to the futures market
because Forex contracts are actually short-term futures contracts.
But even though both markets have many of the same features, the
retail Forex market has a few key added benefits you won’t want to
be without.
The futures market is also often called the commodities market
because commodity futures make up a large portion of the market.
In fact, the futures market was originally created to trade commodities.
Nowadays, however, the futures market branches out much
farther than commodities—corn, soybeans, orange juice, pork bellies
(bacon), and so forth. You can now trade futures contracts on everything
from the S&P 500 to the weather. That’s right; you can trade
weather contracts on the futures market.
A futures contract is a promise to deliver something—be it
100,000 barrels of oil or $100,000 cash—at a certain price on a certain
date in the future in exchange for some sort of consideration. For
example, if you owned a stack of gold bricks and you thought gold
was going to be worth less one year from now than it is today, you
might sell a futures contract on gold that states that the buyer of the
futures contract has to buy your gold in one year at the same price
it is selling at today. That way, if the price of gold does indeed go
down, the buyer of the futures contract will still pay you the higher
price in exchange for your gold.
You can also take advantage of the futures market when prices
are going up. Suppose you knew that you had to buy a pile of gold
bricks in one year, and you thought gold prices were going to go
18 CHAPTER 1
up. In this case, you could buy a futures contract from somebody
who agrees to sell you their gold in one year at the same price at
which it is trading today. That way, if the price of gold does indeed
go up, you will be able to buy your pile of gold bricks at a discount
because you would be buying it at the same price at which it was
trading the previous year.
You can see that many of the benefits that are available to you in
the Forex market are also available in the rest of the futures market.
As good as the rest of the futures market is, however, there are still a
few gaps the Forex market can fill.
Gap 1: Commissions Most futures brokers charge a commission
for each transaction to cover their costs and increase the bottom
line. You will need to pay this commission when you enter a trade
and when you exit a trade.
Gap 2: Market Hours Most futures contracts trade in much the
same way as the U.S. Treasury bonds and notes trade on the CBOT;
they trade on exchanges that have both electronic trading platforms
and physical trading floors. The trading floors, or pits, are open only
during certain business hours. So if your broker transacts business
only on the trading floor, you will have to meet the demands of its
schedule. The futures market is available for after-hours trading on
electronic markets, such as the GLOBEX, but you often have to pay
extra fees to access these trading platforms.
Many different futures exchanges service the futures market,
with each one specializing in different futures contracts. And each
exchange has its own set of trading rules and schedules. You may
have heard of a few of them. The Chicago Mercantile Exchange (CME)
specializes in trading commodities futures, currency futures, and
stock index futures. The New York Mercantile Exchange (NYMEX)
is most well known for trading oil futures. And the New York Board
of Trade (NYBOT) specializes in trading sugar, coffee, and U.S. dollar
futures. While this is far from a comprehensive list, these are three of
the major players.
Gap 3: Liquidity Because most of the trading in the futures markets
occurs in the trading pits, the liquidity of the futures market
dries up somewhat during nonbusiness hours. Even though the
market is available for trading during the night via the GLOBEX
and other electronic exchanges, if no one is awake to be on the
Profiting with Forex 19
other side of your trade, it is going to be very difficult to buy or sell
anything at a decent price. The Forex market, in contrast, provides
dealers who are willing to guarantee they can fill your orders at a
favorable price even in the off-peak hours when the market isn’t
seeing a lot of activity.
Gap 4: Taxes This gap does not exist in the futures market
because every futures contract receives the same tax treatment the
futures contracts in the Forex market enjoy.
Gap 5: Bear (Downtrending) Markets This gap does exist
in the futures market, but it exists in a form that is slightly different
from that in the stock or bond markets. While you can buy futures
contracts when you think they are going up and sell them when you
think they are going down, you do not have any guarantees on your
exit prices. Imagine you had sold a futures contract on coffee because
you believed that the price of coffee was going to decline during the
next few years. Then, out of the blue, a little franchise called Starbucks
exploded across the nation, and the demand for coffee soared. This
increased demand pushed the value of your futures contract higher,
and you were suddenly losing money. The futures market does not
have guaranteed stops. You can set stop-loss orders, but the prices
you establish in your stop-loss orders are not guaranteed to be met.
If the price of coffee rises too fast, you may end up losing more
money than you bargained for.
Gap 6: Analysis Overload While there are certainly not as
many investment choices in the futures market as there are in the
stock market, you will still have to sift through a lot of possible
contracts and news events to adequately track the futures market.
Following is an example of some of the commodity futures contracts
available through the futures market:
Grain and Oilseed Futures
■ Corn
■ Oats
■ Soybeans
■ Soybean meal
■ Soybean oil
■ Rough rice
■ Wheat
20 CHAPTER 1
■ Barley
■ Canola
Livestock Futures
■ Cattle—live
■ Lean hogs
Food and Fiber Futures
■ Lumber
■ Cocoa
■ Coffee
■ Sugar
■ Cotton
■ Orange juice
■ Azuki beans
■ Wool
■ Silk
■ Rubber
■ Copper—high grade
■ Gold
■ Platinum
■ Silver
■ Lead
■ Aluminum
■ Nickel
■ Palladium
■ Tin
■ Zinc
Petroleum Futures
■ Crude oil—light sweet
■ Heating oil No. 2
■ Gasoline
■ Natural gas
You get the idea. We haven’t gotten into the financial futures
contracts—like stock-index futures, single-stock futures, interestrate
futures, and so on.
Profiting with Forex 21
Forex Gap Because Forex contracts are futures contracts, there
isn’t really a Forex gap that the rest of the futures market can fill. You
can get involved in the Forex market with less money than you need
in the futures market, you can trade with high liquidity 24 hours
per day, and you have guaranteed stops. It doesn’t get much better
than that.
In discussing both the stock and the bond market, we talked
about how the Forex market is a nice complement to the investing
you are already doing and that you should continue to invest in both
the stock and bond markets. The futures market is really another
story. You can easily replace all the investing you are doing in the
futures market by investing in the Forex market. For example, if you
believe commodity prices are going to be going up, instead of taking
positions in multiple commodity futures contracts, you could place
one simple trade to buy the Canadian dollar. Canada exports more
commodities to the United States than any other country. In fact,
Canada is the United States’ largest trading partner. (We discuss this
in more detail later in the book.) As commodity prices rise, the value
of the Canadian dollar rises as well. So if you had a choice between
putting a lot of money into various futures contracts that do not have
guaranteed stops and putting a little bit of money into one Forex
contract that has a guaranteed stop and great leverage, which would
you choose?
The Forex market is an incredible profit-generating machine on
its own, and it is especially effective at filling the inherent gaps in
other financial markets. So if you’re investing in the stock or bond
market, ask yourself why you shouldn’t also be investing in the Forex
market. There’s no good reason. Investing in either of these two markets
without investing in the Forex market is like buying homeowner’s
insurance without buying an umbrella liability policy. Sure,
most of the things that happen to your home will be covered by the
homeowner’s policy, but there are other major claims that won’t be.
Do your portfolio a favor, and give yourself all the opportunities
available to protect what you have while making your money work
even harder for you.Forex Market versus Futures Market
It may seem strange to compare the Forex market to the futures market
because Forex contracts are actually short-term futures contracts.
But even though both markets have many of the same features, the
retail Forex market has a few key added benefits you won’t want to
be without.
The futures market is also often called the commodities market
because commodity futures make up a large portion of the market.
In fact, the futures market was originally created to trade commodities.
Nowadays, however, the futures market branches out much
farther than commodities—corn, soybeans, orange juice, pork bellies
(bacon), and so forth. You can now trade futures contracts on everything
from the S&P 500 to the weather. That’s right; you can trade
weather contracts on the futures market.
A futures contract is a promise to deliver something—be it
100,000 barrels of oil or $100,000 cash—at a certain price on a certain
date in the future in exchange for some sort of consideration. For
example, if you owned a stack of gold bricks and you thought gold
was going to be worth less one year from now than it is today, you
might sell a futures contract on gold that states that the buyer of the
futures contract has to buy your gold in one year at the same price
it is selling at today. That way, if the price of gold does indeed go
down, the buyer of the futures contract will still pay you the higher
price in exchange for your gold.
You can also take advantage of the futures market when prices
are going up. Suppose you knew that you had to buy a pile of gold
bricks in one year, and you thought gold prices were going to go
18 CHAPTER 1
up. In this case, you could buy a futures contract from somebody
who agrees to sell you their gold in one year at the same price at
which it is trading today. That way, if the price of gold does indeed
go up, you will be able to buy your pile of gold bricks at a discount
because you would be buying it at the same price at which it was
trading the previous year.
You can see that many of the benefits that are available to you in
the Forex market are also available in the rest of the futures market.
As good as the rest of the futures market is, however, there are still a
few gaps the Forex market can fill.
Gap 1: Commissions Most futures brokers charge a commission
for each transaction to cover their costs and increase the bottom
line. You will need to pay this commission when you enter a trade
and when you exit a trade.
Gap 2: Market Hours Most futures contracts trade in much the
same way as the U.S. Treasury bonds and notes trade on the CBOT;
they trade on exchanges that have both electronic trading platforms
and physical trading floors. The trading floors, or pits, are open only
during certain business hours. So if your broker transacts business
only on the trading floor, you will have to meet the demands of its
schedule. The futures market is available for after-hours trading on
electronic markets, such as the GLOBEX, but you often have to pay
extra fees to access these trading platforms.
Many different futures exchanges service the futures market,
with each one specializing in different futures contracts. And each
exchange has its own set of trading rules and schedules. You may
have heard of a few of them. The Chicago Mercantile Exchange (CME)
specializes in trading commodities futures, currency futures, and
stock index futures. The New York Mercantile Exchange (NYMEX)
is most well known for trading oil futures. And the New York Board
of Trade (NYBOT) specializes in trading sugar, coffee, and U.S. dollar
futures. While this is far from a comprehensive list, these are three of
the major players.
Gap 3: Liquidity Because most of the trading in the futures markets
occurs in the trading pits, the liquidity of the futures market
dries up somewhat during nonbusiness hours. Even though the
market is available for trading during the night via the GLOBEX
and other electronic exchanges, if no one is awake to be on the
Profiting with Forex 19
other side of your trade, it is going to be very difficult to buy or sell
anything at a decent price. The Forex market, in contrast, provides
dealers who are willing to guarantee they can fill your orders at a
favorable price even in the off-peak hours when the market isn’t
seeing a lot of activity.
Gap 4: Taxes This gap does not exist in the futures market
because every futures contract receives the same tax treatment the
futures contracts in the Forex market enjoy.
Gap 5: Bear (Downtrending) Markets This gap does exist
in the futures market, but it exists in a form that is slightly different
from that in the stock or bond markets. While you can buy futures
contracts when you think they are going up and sell them when you
think they are going down, you do not have any guarantees on your
exit prices. Imagine you had sold a futures contract on coffee because
you believed that the price of coffee was going to decline during the
next few years. Then, out of the blue, a little franchise called Starbucks
exploded across the nation, and the demand for coffee soared. This
increased demand pushed the value of your futures contract higher,
and you were suddenly losing money. The futures market does not
have guaranteed stops. You can set stop-loss orders, but the prices
you establish in your stop-loss orders are not guaranteed to be met.
If the price of coffee rises too fast, you may end up losing more
money than you bargained for.
Gap 6: Analysis Overload While there are certainly not as
many investment choices in the futures market as there are in the
stock market, you will still have to sift through a lot of possible
contracts and news events to adequately track the futures market.
Following is an example of some of the commodity futures contracts
available through the futures market:
Grain and Oilseed Futures
■ Corn
■ Oats
■ Soybeans
■ Soybean meal
■ Soybean oil
■ Rough rice
■ Wheat
20 CHAPTER 1
■ Barley
■ Canola
Livestock Futures
■ Cattle—live
■ Lean hogs
Food and Fiber Futures
■ Lumber
■ Cocoa
■ Coffee
■ Sugar
■ Cotton
■ Orange juice
■ Azuki beans
■ Wool
■ Silk
■ Rubber
■ Copper—high grade
■ Gold
■ Platinum
■ Silver
■ Lead
■ Aluminum
■ Nickel
■ Palladium
■ Tin
■ Zinc
Petroleum Futures
■ Crude oil—light sweet
■ Heating oil No. 2
■ Gasoline
■ Natural gas
You get the idea. We haven’t gotten into the financial futures
contracts—like stock-index futures, single-stock futures, interestrate
futures, and so on.
Profiting with Forex 21
Forex Gap Because Forex contracts are futures contracts, there
isn’t really a Forex gap that the rest of the futures market can fill. You
can get involved in the Forex market with less money than you need
in the futures market, you can trade with high liquidity 24 hours
per day, and you have guaranteed stops. It doesn’t get much better
than that.
In discussing both the stock and the bond market, we talked
about how the Forex market is a nice complement to the investing
you are already doing and that you should continue to invest in both
the stock and bond markets. The futures market is really another
story. You can easily replace all the investing you are doing in the
futures market by investing in the Forex market. For example, if you
believe commodity prices are going to be going up, instead of taking
positions in multiple commodity futures contracts, you could place
one simple trade to buy the Canadian dollar. Canada exports more
commodities to the United States than any other country. In fact,
Canada is the United States’ largest trading partner. (We discuss this
in more detail later in the book.) As commodity prices rise, the value
of the Canadian dollar rises as well. So if you had a choice between
putting a lot of money into various futures contracts that do not have
guaranteed stops and putting a little bit of money into one Forex
contract that has a guaranteed stop and great leverage, which would
you choose?
The Forex market is an incredible profit-generating machine on
its own, and it is especially effective at filling the inherent gaps in
other financial markets. So if you’re investing in the stock or bond
market, ask yourself why you shouldn’t also be investing in the Forex
market. There’s no good reason. Investing in either of these two markets
without investing in the Forex market is like buying homeowner’s
insurance without buying an umbrella liability policy. Sure,
most of the things that happen to your home will be covered by the
homeowner’s policy, but there are other major claims that won’t be.
Do your portfolio a favor, and give yourself all the opportunities
available to protect what you have while making your money work
even harder for you.