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Forex or Currency Futures?

Currencies are the money of different countries, and currency trading is the buying and selling of these currencies. There are almost as many different currencies as there are countries, but the most popular currencies for trading are the US Dollar, the Euro, the British Pound (Sterling), and the Japanese Yen. The currency markets are some of the most popular day trading markets, and they therefore have some of the highest volume (number of contracts) and liquidity. This high volume and liquidity makes the currency markets attractive to all types of traders, including individual day traders, trading companies, financial and non financial companies, banks, and governments.

There are several different ways of trading currencies, and even non traders are familiar with one form of currency trading. When people go on holiday to a different country they often need to exchange their local currency for the currency of the destination country. For example, a tourist from the US would need to exchange their US Dollars for Mexican Pesos if they went to Mexico on holiday. This exchange would be processed via a currency broker (such as a bank), and the transaction would become part of the currency markets. This type of currency trading is not suitable for professional traders, so two other forms of currency trading are used by day traders.

Forex (FOReign EXchange)

Forex trading is one of the most popular ways of trading the currency markets. Forex markets trade the actual exchange rate between two currencies. For example, the most popular Forex market is the Euro to US Dollar exchange rate (EUR to USD), which trades the value of 1 Euro in US Dollars. There are Forex markets for most of the major currencies, including the following :

* EUR -> USD - The Euro to US Dollar exchange rate
* GBP -> USD - The British Pound (Sterling) to US Dollar exchange rate
* EUR -> GBP - The Euro to British Pound exchange rate
* CAD -> USD - The Canadian Dollar to US Dollar exchange rate
* AUD -> USD - The Australian Dollar to US Dollar exchange rate
* EUR -> CHF - The Euro to Swiss Franc exchange rate

As the Forex markets are global markets, they trade 24 hours per day from Monday morning in New Zealand (Sunday night in the US) until Friday night in Asia (also Friday night in the US). Forex markets are different from most day trading markets in that they are not provided by an exchange. Forex markets are decentralized markets, where all trades are directly between two traders (or a trader and a Forex broker). This means that there could be several different exchange rates for the same currencies, depending upon factors such as the location of the traders, and the brokers being used.

Forex markets trade the currencies directly (rather than trading contracts), and the minimum amount that can be traded is known as a lot. The size of a lot is dependant upon the Forex broker being used, but is commonly at least $25,000. This amount is usually margined, so individual traders do not need to have anywhere near the lot size in their trading account, and will borrow most of the lot size from their Forex broker instead.

Currency Futures

Currency futures are futures markets that are based upon the currency markets. Currency futures markets trade futures contracts that reflect the exchange rates of two currencies. For example, the most popular currency futures market is the EUR futures market, which is based upon the Euro to US Dollar exchange rate. The most popular currency futures are provided by the CME Group (formerly the Chicago Mercantile Exchange), and include the following futures markets :

* EUR - The Euro to US Dollar futures market
* GBP - The British Pound (Sterling) to US Dollar futures market
* CAD - The Canadian Dollar to US Dollar futures market
* CHF - The Swiss Franc to US Dollar futures market

As they are futures markets, currency futures are provided by an exchange. This means that they have centralized pricing (and clearing), so the market price is the same regardless of the brokerage being used. Currency futures markets also trade 24 hours per day from Sunday night until Friday night in the US, so they are accessible to traders worldwide, even though all of the trades go through the same exchange.

Currency futures trade futures contracts that are worth a specific amount of the underlying currency. For example, the EUR futures contract is worth $125,000. The contract specifications for each currency futures market specifies the contract value, and other trading information such as the minimum price change (tick size) and the price change value (tick value).

Forex or Futures

Even though both the Forex markets and the currency futures markets are based upon the same underlying financial markets, there are some significant differences that make one or the other the best choice for day trading. The Forex markets have very large liquidity (amount of money traded) so they can absorb very large trades (millions of dollars) without the market being affected, whereas the currency futures can only absorb a certain number of contracts (usually less than 100) before the market becomes affected by the trade. On the other hand, the currency futures markets are regulated markets, so they are not susceptible to price fixing (also known as market making).

Unless you have several million dollars that you want to trade with, or you want to convert one currency to another indefintely (i.e. not convert it back again), the currency futures markets are the best choice for individual day traders. The two most popular currency futures markets are the EUR (Euro to US Dollar futures market), and the GBP (British Pound to US Dollar futures market), and complete information about these (and other) markets (including their contract specifications) can be found in their market profiles.

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