Okay, I’d like to preface this post by saying that I have not yet begun live trading in the futures market.  This serves more as a newbie’s perspective before entering the fray.  When I started this blog, I wrote a post titled “Why Forex?“.  I’d like to take the points that I listed and apply them to the futures market, along with some additional benefits of trading FX futures on CME’s GLOBEX system.

24 hour market : Forex, check.  Futures, check…almost. The futures trade 23 hours a day.  The market is closed for maintenance between 5 and 6 PM Eastern time.  Although some might argue that 23 hours is practically the same as 24, I disagree.  I hope that some day the CME will have the technology to keep the market open 24 hours a day.  From a practical standpoint, however, this would not deter me from trading the futures.

Availability of leverage: There is a high availability of leverage in both markets, and although forex affords access to greater leverage, I can say from experience that trading beyond the maximum leverage levels allowed in the futures market is really a recipe for disaster anyway.

Availability of free software for automated trading:  Okay, this is where I sang the praises of Metatrader, because it is free and widely available.  I still believe that this is a big deal.  In the futures market, I am experimenting with TradeStation.  This platform is also free if one trades a sufficiently large volume, and the hurdles aren’t that high.  Real-time data for the CME electronic contracts also carries a monthly fee.  At this point in my trading career, these costs are not a deterrent, and at first glance, the power of TradeStation’s platform absolutely dwarfs MetaTrader.

Easy Access to Paper Trading :  There is also easy access to paper trading in the futures market, although I don’t know for sure whether or not there is easy access to free paper trading on a platform that allows for automated execution of user-defined strategies. 

Low start up capital requirement: This absolutely still holds as a benefit for the retail forex market.  Again, at this point in my trading career, it is not an issue.

Depth of liquidity:  This point is really a tricky one.  The liquidity in the futures market is TRANSPARENT.  Although it may certainly be less liquid than the OPAQUE OTC forex market, I’ll simply say that the liquidity is ample for me at this time, and the benefits of a central exchange with transparent pricing is huge.

So that covers the original points.  Now I’d like to add some benefits of trading in the futures markets.

Safety of Funds on Deposit — Regulation and truly segregated customer accounts are a stand out benefit.  Some forex dealers claim to have segregated customer accounts, but lack of regulation means that in a pinch, anything can happen…think Refco and the relative agony experienced by its forex customers vs. it’s futures customers.

Cost - I’ve often seen “zero commission” and “tight spreads” being listed as a benefit of trading forex.  This is really just a fancy way of saying “obscured compensation” and “dealer-controlled spreads”.  Now, I’ve yet to trade in the futures markets, so I can’t really comment on total costs of one market against the other.  The spreads in the futures market appear to be 1 to 2 ticks in a quiet market.  Unless the slippage is excessive in futures, I believe that the total transactions cost of trading in the futures market will be lower than trading in the retail forex market.  I’ll have more to say on this when I have some live trading experience under my belt.

Swaps are “on the chart” — Let me explain.  In the cash forex market, there is a rollover (”swap”) that occurs every day.  While some carry traders must surely enjoy getting large cash swaps on a daily basis, this is really analogous to preferring to receive cash dividends as opposed to capital gains.  In a properly functioning futures market, the difference between the spot price and the futures price represents the cumulative value of expected swap payments until the contract’s expiration.  In other words, as the time to expiration decreases, the futures and spot price must converge.  Although no swaps are paid out on a daily basis, interest rate differentials show up on the futures charts as a time-decaying swap premium or discount that converges to zero as expiration approaches.

Okay, that explanation is long-winded, nerdy, and perhaps unreadable.  The short version is that swaps are something that are outside of the chart, and as a technical trader, I’ve always hated that.  I want to trade the chart and have all the information that will affect my trading performance be represented on the chart.  I give futures the edge here.

Unambiguous taxation — Due to retail forex trading’s rising popularity and relative novelty, the taxation of spot forex gains is a little bit cloudy.  As I understand it IRC 988 and IRC 1256 are overlapping and conflicting, and subject to interpretation.  Please go elsewhere for forex tax advice, as I do not provide those services.  The taxation of futures contracts is covered entirely by IRC 1256, and while such taxation is not beneficial for losing traders, it is beneficial for winning traders and it is unambiguous.

So there you have it.  I will write up my thoughts about TradeStation after I have more experience with it.

So when I get right down to it, my feeling today is that futures will provide a superior experience for me.  Forex certainly is better for traders with small accounts (<5K USD), and perhaps for super large traders, where depth of liquidity again becomes an issue.  Folks who love the carry trade may also prefer the spot market, but even this preference is subjective.