It is common for uninformed individuals to think that FX trading is like all other forms of speculative trading. Their logic is simple in that if the core action is to buy and sell then all investment markets will be the same. This preconceived notion is the main reason that so many individuals interested in currency trading fail.
A lot of individuals interested in FX trading come from the futures market i.e. they are formerly futures traders who have decided to switch the market they operate in. Such traders often bring concepts from futures trading into forex trading which proves to be their downfall.
Therefore, if you are also an individual who used to be a futures trader then if you want to succeed in forex trading you will need to understand how the forex market differs from the futures market.
Liquidity Which Exists in the Market
Liquidity is the single most important aspect of any investment market. It defines everything from the number of opportunities traders get to the level of independence the prices in the market exhibit. What this all implies is that the liquidity of any investment market determines how much profit a trader can gain and at what frequency.
FX trading wins out from this perspective because the forex market boasts of a steady liquidity of around 2 trillion American dollars while the futures market can only claim to have 400 billion American dollars.
Regulation of the Market and Freedom of Rates
The forex market also benefits from the fact that it is not regulated and its trends and patterns are governed by natural market forces as opposed to specific policy changes or restrictions. This is not something which can be said about the futures market where limitations and restrictions are placed on traders in a variety of ways.
Cost of Each Transaction Made in the Market
Another area where FX trading is different from futures trading is in the transactions costs. These are much higher in the latter field than in the former field. Typically, the forex market boasts of tight spreads and low commissions while traders in the futures market are hamstrung by particularly wider spreads and high commissions. This can make a huge difference in the net profits or losses of traders wherein commissions get deducted from profits or added to losses.
The Level of Leverage That Traders Can Use
Even though almost no trader uses the maximum leverage that the forex market offers, having the option of up to 400 to 1 maximum leverage is a big boon over the futures market where the maximum leverage a trader can use is much lower.
Moreover, the variation in leverage offered for overnight and daytime positions in the futures market can also be a problem for traders when compared to the fact that the leverage offered in FX trading is the same for all types of positions.
FX trading is unlike any other form of trading with a wide number of aspects varying greatly. This includes the futures market.