As I promised last week today we will talk about the benefits of trading futures over CFDs and forex. I have to mention that Futures and CFDs are derivatives. They derive their value from an underlying asset or instrument.

Futures vs CFDs and Forex. Benefits 

The 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.
On other hand, CFDs are less regulated. Therefore, it gives a lot of opportunities for market makers to manipulate the price. Why they need it? – Most CFD brokers trade against their clients. This means if clients (traders) lose money, the broker wins. If brokers know some of their clients are good traders, they will hedge such positions in the real market (futures market). So, they are not losing money at all. The price of the same CFD can be different depending on the broker. That gives the opportunity to hunt clients’ stops or make slippage.

Cost of trading

Not many traders pay attention to the cost of trading. That is a big mistake. If you trade futures, you pay only a standard commission. But you are still in CFDs or forex market, more likely you have markups, swaps, etc.
Benefits of trading futures over CFDs and forex by Inna Rosputnia
Swap is an interest rate you pay for holding your position overnight. It has to be calculated by a specific formula, as all central banks have different interest rates. But the keyword here is ‘it has to be’. Most brokers add a lot of other fees to it. As result traders pay a lot of money, not the constant amount that should be calculated by the 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 get an idea, that all these payments are not significant, but they are. Just make some calculations. How many fees, including swaps, etc. do you pay each week? Then calculate the annual cost of your trading.
benefits of trading futures over cfds and forex

I will help you. If you have 50k on your account and execute few trades per day, each year you pay your broker on average $10k. It’s 20% of your deposit. That’s a lot of money. You have to work hard to get it back from the market. Sure, these calculations can range depending on your broker and your trading style. But I advise checking your cost of trading CFDs and forex. The cost of trading is one of the main reasons I trade futures on my own trading account and on managed accounts.

Currency futures

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 a risk something can go wrong as the result of unexpected events or simple market manipulation. But if you trade forex you have double the risk of such an event. So, yes, trading futures is less risky and takes less time to make a good analysis and study the market.

Wishing you a great week!

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