Hello traders! Over the past few months of teaching with Online Trading Academy, a question has come up more and more often with new students. “Which account/asset class should I start trading first? Futures or spot forex?” This week’s newsletter will discuss the major differences between the two markets.
Believe it or not, nearly every decision we make in trading (much like life) has potential positive things and potential negative things associated with that decision. If I choose to have a super small stop loss because I am trading with a very small supply or demand zone, this means I get to take a large position; however, when trading with a very small zone, there is a chance I won’t get filled on my trade. See? Both a positive and a negative. Many new traders/students choose to start with one leveraged asset class or another; my personal belief is that you will probably end up trading both asset classes, if not, stocks and options as well. Being a well-rounded trader using multiple asset classes allows us to take advantage of every type of market, being trending or sideways channeling.
The most significant difference between a futures account and a spot forex account are the actual things that you can trade. With a futures account, you can trade stock market indexes, bonds, metals like gold and copper, cattle, wheat, even currencies! However, your choice of currencies is a bit limited. When actual trading volume is taken into consideration, there are only a handful of currency pairs that are “worth” trading. When considering the choices available for trading with a spot forex account, in the United States we are limited to trading just currency pairs (some foreign countries allow trading in metals in their forex accounts). However, we do have the ability to trade many more currency pairs than are “worth” trading in the futures market. So each account has the ability to trade different things/symbols.
A second very significant difference between the two markets is the amount of actual dollar risk it takes to trade them. When trading the S&P 500 futures contract (the ESZ14 at the time of this writing), having a two point stop loss means you are risking approximately $100 per contract, perhaps more if you get any slippage, plus you must factor in commissions as an expense. More contracts would obviously add more dollar risk. If you were planning on exiting with two profit targets, hence entering with at least two contracts, your dollar risk would then be $200. For a new trader with a small account, losing $100 per trade as your “learning curve” tuition can be daunting! There are several e-micro futures contracts you could trade to make your dollar risk even less, but these are only on a few currency pairs. In addition, the volume on these contracts is pretty low. When trading in the spot forex market, trading micro lots at most brokerage firms will allow you to trade with stops that actually cost you as little as one dollar! Yes, you read that right. Now, you won’t be able to make an actual living when risking a dollar on your trades, but at least it will be cheap tuition!
Yet another major difference in these markets is the cost to trade, based on the margin required to buy one contract (in futures) or a lot (in spot forex). The cost to purchase one contract in the futures markets varies by several factors: what your chosen broker charges, and what the exchange requires, and does the contract have a “day-trade buying power” leverage increase. When trading the e-mini S&P 500 futures contract, it takes $5060 of initial margin to purchase one contract. When using the day-trade rate, your contract costs 25% of that (at our partner Tradestation). When buying one contract of the EUR/USD in their futures market, the cost is $2310, and one standard lot in the spot forex market is approximately $2477.00. Some lots are much cheaper, some are more expensive.
So there you have a few of the big differences. The very basics are: with futures markets, you can trade many different actual things-like metals, indexes, bonds, and some currencies. With a spot forex account, you get to trade only currencies, (but more of them). In the futures market, generally your expenses will be higher when measured by dollar risk, amount needed to trade, and cost to do the individual trades. Spot forex then has the benefit of being cheaper to trade and learn the skills.
As stated earlier, every decision you make in trading has potential positives and negatives, and it is up to you to decide which is better for your circumstances. Eventually, you’ll probably do both asset classes, and I hope to see you in one of my classes!
Until next time,