When most people in the United Kingdom think about trading, they probably think about forex trading. After all, it’s the most common form of trading here. But a different type of trading is popular in the UK – futures trading. In the article, we’ll look at the key differences between these two types of trading. We’ll also explore why futures trading might be a good option for some traders in the UK.
What is forex trading, and what is futures trading?
Most people in the UK are familiar with forex trading. It’s a type of investment that involves buying and selling foreign currencies. Forex trading aims to profit by speculating on the movement of currency pairs. For example, if you think the pound will strengthen against the US dollar, you might buy GBP/USD. If your prediction comes true and the pound does indeed rise in value, you’ll make a profit. On the other hand, if your prediction is incorrect and the pound falls against the dollar, you’ll make a loss.
Futures trading is similar to forex trading in that it’s a type of investment that involves speculation on the movement of currency pairs. However, there are some key differences.
What are the differences between forex and futures trading
One significant difference is that futures contracts are standardized, while forex trades are not. It means that when you trade futures, you agree to buy or sell a certain amount of an asset at a predetermined price and date in the future. For example, you might agree to buy 100 barrels at $50 per barrel in one month. You’ll make a profit if the oil price rises to $60 per barrel by the contract expires. If the price falls to $40 per barrel, you’ll make a loss.
Another critical difference between forex and futures trading is that futures contracts are traded on exchanges, while forex trades are not. It means that when you trade futures, you enter into a contract with another trader. In contrast, when you trade forex, you buy or sell currency pairs directly from a broker.
Why trade futures?
For several reasons, futures trading might be a good option for some UK traders. First of all, as we’ve mentioned, futures contracts are standardized. It means that there is less risk involved than in forex trading. You know what you agree to buy or sell and at what price.
Secondly, as futures contracts are traded on exchanges, there is more transparency and price discovery than in the forex market. It means it’s easier to find out what prices are being quoted for a particular contract and to get an idea of where the market is heading.
Finally, you can use futures contracts to hedge against risk. For example, if you’re a farmer worried about the price of wheat falling, you could buy a wheat futures contract. It would give you the right to sell wheat at a fixed price in the future, regardless of the actual price of wheat at that time.
The risks associated with each type of trade
Of course, no type of trading is without risk. When you trade forex, you’re exposed to the risk of currency fluctuations. It means that your profits (or losses) will be affected by changes in the exchange rate. For example, if you buy GBP/USD and the pound falls against the dollar, you’ll make a loss.
When you trade futures, you’re also exposed to the risk of price fluctuations. However, as contracts are standardized, you know exactly how much you agree to buy or sell an asset. It makes it easier to manage your risk, as you can calculate your potential losses (or profits) in advance.
Another risk to consider is counterparty risk. The risk is that the person you’re trading with doesn’t fulfil their side of the contract. For example, if you buy a wheat futures contract from a farmer, there’s a risk that the farmer might not have any wheat to sell you when the contract expires. It is known as counterparty risk, which you must be aware of when trading both forex and futures.
Forex and futures trading can be profitable if you can correctly predict movements in the financial markets. However, there are some critical differences between these two types of trading. Futures contracts are standardized, while forex trades are not. Futures contracts are also traded on exchanges, while forex trades are not. Read more Saxo’s website about forex and futures trading in the United Kingdom.