As I promised last week today we will talk about benefits of trading futures over CFDs and forex. I have to mention that Futures and CFDs are both derivatives. They derive their value from an underlying asset or instrument.
Main difference comes from regulation. Futures markets are regulated by the U.S. Commodity Futures Trading Commission (CFTC), which is an independent government agency. Additionally, the CFTC protects market participants and the public from any fraud, manipulation or abusive practices. The National Futures Association (NFA) is a self-regulatory organization for the U.S. Derivatives Industry which includes futures. Since this market is regulated, futures are traded in a centralized marketplace where all prices are known to everyone. Trading is open, fair and anonymous.
Other situation around CFDs, less regulation gives a lot of opportunities for market makers
to manipulate price. Why they need it? – Most of CFDs brokers trade against their client. Means, if clients (traders) lose money, broker wins. If brokers know some of their clients are good traders, they will hedge such positions in real market (futures market). So, they are not losing money at all. Price of the same CFD can be different depending on broker. That gives opportunity to hunt clients stops or make slippage.
Not many traders pay attention to cost of trading. That is big mistake. If you trade futures, you pay only standard commission. But you are still in CFDs or forex market, more likely you have markups, swaps etc.
Swap is an interest rate you pay for holding your position over night. It has to be calculated by specific formula, as all central banks has different interest rates. But key word here is ‘it has to be’. Most of brokers add a lot of other fees to it. As result traders pay a lot of money, not constant amount that should be calculated by basic formula. Is it legal? – Well, as there is no enough regulation, this robbery still remains legal.
Also, your broker can add extra pips to your standard spread. It’s called markups
. You may got an idea, that all these payments are not significant, but they are. Just make some calculations. How much fees, including swaps etc do you pay each week? Then calculate annual cost of your trading. I will help you. If you have 50k on your account and execute few trades per day, each year you pay your broker in average $10k. It’s 20% of your deposit. That’s a lot of money. You have to work hard to get it back from market. Sure, this calculations can range depending on your broker and your trading style. But I advice to check your cost of trading CFDs and forex. Cost of trading is one of main reasons I trade futures on my own trading account and on managed accounts
Special attention I want to pay to currency futures. If you trade forex, you have to analyze 2 currencies in the pair, their strength etc. No matter how good your analysis is, there is always risk something can go wrong in result of unexpected event or simple market manipulation. But if you trade forex you have double risk of such event. So, yes, trading futures is less risk and takes less time to make good analysis and study market.