Cash Forex versus Currency Futures

As a potential new trader, it is important for you to understand the differences between cash Forex and currency futures. In currency futures, the contract size is predetermined. Futures traders exercise leverage by utilizing a performance bond or margin to control a futures contract. “Margin” is money deposited by both the buyer and the seller to assure the integrity of the contract.

With liquidity in mind, the futures market may seem limiting because the data flow comes to a stop at the end of the business day (just as it does with the stock market), thus disrupting your perception of the market. For some traders this could lead to a certain level of anxiety. For example, if important data comes in from England or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride.

In contrast to the futures market, the spot Forex market is a 24-hour, continuous currency exchange that never closes. There are dealers in every major time zone, in every major dealing center (i.e., London, New York, Tokyo, Hong Kong, Sydney, etc.) willing to quote two-way markets. The size of this market, a $1.5 to $3.5 trillion dollar per day market gives you near perfect liquidity. Because of the advantages of sheer volume and daily volatility, the excitement of this market is unparalleled.

About Forex

The Forex market is a cash inter-bank or inter-dealer market established in 1971 when floating exchange rates began to materialize. Today, the exchange of currency has expanded from trading floors to home computers. The simplest definition of foreign exchange is the changing of one currency to another, and, unlike the stock market, one may earn profits whether buying or selling within the currency exchange. In comparison to the daily trading volume averages of $300 billion in the U.S. Treasury Bond market and the less than $10 billion exchanged in the U.S. stock markets, the Forex market is huge. Currently there is often an average of 3.5 trillion levels exchanged daily.

The most important foreign exchange activity is the spot business between the dollar and the four major currencies (Euro, British Pound, Swiss Franc and Japanese Yen). Activity within the market is created by six main groups: central banks, commercial banks, other financial institutions, corporate customers, brokers and independent currency traders who have established home-based businesses.

Forex is not a "market" in the traditional sense. There is no centralized location for trading activity as there is in currency futures. Trading occurs over the telephone and through computer terminals at thousands of established locations, as well as within home-based trading businesses worldwide.