Forex or Futures? Key Differences Every Trader Should Know
When comparing forex vs futures, most traders often judge the two based on returns. But before we go any further, the futures in this article are perpetual futures, or perps.
Understanding the difference between futures and forex is crucial before deciding which market better fits your trading strategy. In this guide, we will discuss futures and share the differences between forex and futures.
What Are Perpetual Futures?
Most of the time when people hear about futures, they think of the traditional futures contracts. However, perpetual futures also exist, and while they share similarities with traditional futures, they are an entirely different financial instrument.
Perpetual futures are derivative contracts designed to track the price of an underlying asset without a traditional expiration date. They are particularly prominent in cryptocurrency trading. For example, you can trade a BTC/USDT perpetual contract rather than buying Bitcoin.
The lack of an expiration date is one of the major differences between traditional futures and perpetual futures.
Forex vs Futures: The Main Differences
Now that you have an idea of what futures are, we can proceed to the main differences.
§ The Underlying Assets
When it comes to forex or futures, the first thing you have to look at is the underlying assets. Forex focuses on currency pairs, while futures provide access to crypto coins and assets.
This difference matters because the underlying assets behave differently. For example, the volatility in forex is not the same as cryptocurrency markets.
§ Trading Hours Can Vary
The next significant difference is in trading hours. The traditional forex market operates 24/5 and closes on weekends. Perpetual futures, particularly cryptocurrency perps, are available 24/7.
If you want continuous market access, including on weekends, trading perpetual futures with an aggregator like Flipper is the best option.
§ Leverage Is Available in Both
Whether you are trading forex or futures, most brokers offer leverage on both. Leverage lets you control a position larger than the amount of capital available in your trading account.
Both forex and cryptocurrency perpetual futures experience sudden, sharp price fluctuations. Combining high volatility with high leverage can yield high profits, but it can also wipe out your account in seconds.
§ Funding Rates Matter in Futures
Worth highlighting when evaluating whether to invest in forex or futures is the funding rate. Since perpetual contracts don’t expire, exchanges use funding payments to keep their prices aligned with the underlying market.
Depending on market conditions, traders holding long positions may pay funding to traders holding short positions, or the reverse may occur. The exact calculation and payment usually occur every eight hours, and fees only apply if you hold an open position during that period.
Forex trading doesn’t rely on funding rates. However, opening positions in the forex market isn’t free. Depending on the broker, you can incur swap charges when positions remain open overnight.
So, when comparing forex with futures, don’t forget to evaluate swap/financing conditions and the funding rate structure.
Wrapping Up
Forex or futures? There is no clear winner between the two. Your choice depends on your trading goals and understanding the underlying market dynamics. Lastly, don’t make your decision based on estimated profits alone.