As a new trader, the futures markets can seem a bit intimidating.
If you currently trade forex and are considering moving into the futures markets, consider some of these similarities and differences in your decidion.
The following is a guest contribution provided by Tom Cleveland of Forex Traders.
If there is one trait that characterizes a trader above most other investors, it is that a trader is always on the lookout for new opportunities where others have failed to go.
Another way to describe this perspective is that there is more opportunity when the “road is less trodden” than if it has been beaten down by the masses.
This unique nature has led to enormous popularity in new trading mediums that for the uneducated seem overly complex and obtuse, but for the experienced trader, they represent “greener pastures” waiting to be harvested.
High Liquidity & Low Margins
Over the past decade, foreign exchange and the futures market have grown enormously, buffeted by throngs of newcomers, both experienced and not so well versed in the skills required in an active trading environment. The latter group, impatient and lacking the proper foundation, has crashed and burned with casualty rates above 65% by some reports, yet futures and forex brokers alike have gone out of their way to educate and supply practice systems to prevent beginners from making fatal trading decisions.
One increasing area of popularity today resides in our futures market where the Chicago Mercantile Exchange (“CME”), in concert with global partners in other regions, have created an electronic trading medium with low margin requirements and nearly “24/7” trading flexibility, a perfect recipe for the individual retail investor searching for a flexible trading genre to achieve his profit objectives.
E-mini S&P index futures and forex futures appear to be the focus of high volume activity in this medium. Although similar in appearance, each of these future contract vehicles is not as identical as they may seem.
- Both instruments are traded over an electronic exchange managed by the CME on daily timeframes that come close to “24/7” availability.
- Position definitions are dictated by standards established by the CME that facilitate easy exchanges and liquidity.
- Accounts are adjusted daily for price changes related to open positions.
- Both instruments benefit from diversification of the underlying security. The S&P index represents the “melding” of results for 500 individual entities. Forex futures rely on the stability of national currencies.
- Safety and soundness concerns are minimized since bankruptcy or fraud are not in the picture.
- Leverage is available to magnify gain potential, but prudent risk management techniques are a necessity to prevent losses from being magnified as well.
- Technical analysis skills easily transfer from other investment mediums
- Liquidity can vary depending on various times during the trading day. E-mini trading volumes ramp up when the U.S. stock markets open at 9:30 AM each day, but forex tends to be more tradable in the earlier morning hours when the London forex market is in full swing and New York is opening at 8:00 AM EST.
- Fundamentals will cause more violent swings and changes in direction in forex valuations. Volatility measures for stocks tend to be much greater than for currencies, but the “commingling” nature of an index lessens the impact of individual news releases for its 500 participants.
- Margin requirements tend to be higher for currency lots than for E-mini contracts, a boon for the individual trader without a great deal of capital to commit to the effort.
Success in these new trading vehicles is no different than with any other medium. Knowledge, experience, and emotional control are the factors necessary to produce consistent positive results over time. Buying low and selling high is still the winning strategy, while technical analysis and good risk and money management principles are the weapons of choice.