Forex vs futures trading: what’s the difference? (2024)

What’s the difference between forex and futures trading?

The difference is that forex trading involves buying and selling currency, while futures trading is a way to trade thousands of financial markets, such as forex, indices, shares, commodities and more.

So, you can trade forex with futures (known as forwards when referring to forex) and other derivative products, while you can trade futures on various financial markets.

With us, you can trade forex on future prices, on the spot and using options. To explain the differences between forex and futures trading, let’s break down each term below.

What is forex trading?

Forex trading – also called FX or currency trading – is the process of converting one currency, such as USD, into another, such as EUR.

This is the mechanism that underpins the global trade in goods and services. Banks, companies and individuals trade around $6.6 trillion in foreign exchange transactions every day. That equates to more than 2.3x the entire annual GDP of the UK.

As mentioned, you have a few different choices when it comes to forex trading. You can trade on the spot (cash) price, forex options or forex futures (called forex forwards). Regardless of how you want to trade forex with us, you’ll do so using derivatives like CFDs.

We explain all of these methods in detail below.

What is futures trading?

Futures trading is an agreement between two parties, a buyer and a seller, to exchange the underlying market for a fixed price at a future date. The buyer is obligated to buy the underlying market and the seller has to sell at or before the expiry of the agreement.

Futures are often used to hedge against expected exchange rate changes. For example, a trader might buy a certain number of EUR/USD forward contracts to lock in an exchange rate. That person will then be obligated to buy those USD when the contract expires – hopefully when the USD’s value has risen, but even if it has dropped.

We offer forex futures (forwards) via CFD trading.

Learn more about futures trading

Forex vs futures: how to trade

You can trade forex and futures with us. Let’s look at how to do both.

How to trade forex

To trade forex with us:

  1. Open an account to trade CFDs on the FX market
  2. Pick the currency pair you want to trade
  3. Choose the way to trade your FX pair – forwards, spot or options
  4. Place your trade

Learn more about forex trading

We offer three ways to trade forex:

  • Futures (forwards): trade a specific currency pair at a set future date. Your choice of currency pair would depend on which currency you believe will strengthen against the other by the set date
  • Spot trading: purchase or sell forex ‘on the spot’. This means the exchange takes place at the same moment the trade is settled. Spot prices reflect the underlying market and have no fixed expiry
  • Options: gain the right, but not the obligation, to buy and sell FX on a specific date in the future (called the expiry) at a specific price (called the strike price)

Note that CFDs are leveraged products, which means that you’ll use a deposit to open your position – while still getting exposure to the full value of the trade. Trading on leverage can be risky, as it magnifies profits and losses, and you can lose more than your initial deposit.

Learn more about the impact of leverage on your trading

If you’re not ready to trade forex at spot or futures prices yet, we’ve also got educational resources like IG Academy with free courses on how to trade. Plus, we offer a demo account – giving you £10,000 in virtual funds to build your confidence in a risk-free environment.

Forex CFD trading account
Spot forex
Forex forwards (futures)
Forex options
Forex vs futures trading: what’s the difference? (1)

How to trade futures

To trade futures with us:

  1. Open a CFD trading account
  2. Pick a futures market to trade
  3. Decide whether to go long or short
  4. Set your stops and limits
  5. Place your trade
  6. Monitor your position

CFD market

SpotFutures/forwards
Shares
ETFs
Indices
Forex
Commodities
Bonds and rates
Forex vs futures trading: what’s the difference? (2)

Forex trading: spot currencies vs currency futures

Remember, you can trade forex using both futures and spot prices. Here are the main differences between the two:

  • With spot trading, the trade is executed immediately and has no expiry, while with futures, the trade only settles on the agreed-upon future date
  • The spread – the difference between the buy and sell price – is potentially much greater for a futures trade than for a spot trade
  • If you keep a spot position open overnight, you’ll pay overnight funding charges. However, with futures, these costs aren’t relevant. That’s because you’d typically day trade with spot forex, while forwards involve position trading over a longer term

Day trading vs position trading

Your trading style determines whether you adopt a day or position trading strategy and, therefore, whether you prefer to trade spot forex or forex forwards.

Spot trading offers tighter spreads but incurs overnight funding fees, so it’s better suited to day traders.

In contrast, futures trading has wider spreads but no overnight fees, so it’s more appropriate for position traders.

Benefits and risks of forex trading

  • Trade over 80 currency pairs
  • Enjoy the freedom to trade futures, spots or options
  • Go long or short
  • Open a position with leverage – increasing your potential profit and loss

Benefits and risks of futures trading

  • Trade forex, indices, commodities and bonds
  • Enjoy no overnight funding charges
  • Go long or short
  • Open a position with leverage – increasing your potential profit and loss

Leverage allows you to get full exposure to the market with a small initial deposit. This is known as margin, which enables you to bring down your initial outlay but may increase both your profits and losses. It’s important to take steps to manage your risk before opening a leveraged position.

Learn more about how leverage impacts your trading

Forex vs futures summed up

  • Forex is a market you can trade with us, using futures, options or spot prices
  • Futures are called forwards in forex trading, and enable you to take a position on forex at a predetermined date in the future
  • You can trade forex or futures using derivatives such as CFDs

As someone deeply entrenched in the world of trading and finance, let's delve into the intricacies of forex and futures trading highlighted in the provided article.

Forex trading, or foreign exchange trading, revolves around the buying and selling of currencies. It's a colossal market that serves as the bedrock of global trade, with transactions surpassing $6.6 trillion daily, surpassing even the GDP of some nations. This market involves various players, from banks to individual traders, engaging in the exchange of currencies like USD and EUR. With forex trading, you have the flexibility to trade through different mechanisms, including spot trading (immediate exchange), forex options, and forex futures, often referred to as forwards. These futures contracts enable traders to lock in exchange rates for future transactions, providing a hedge against potential currency fluctuations.

Futures trading, on the other hand, extends beyond currencies to encompass a plethora of financial markets, including indices, shares, commodities, and more. It involves agreements between buyers and sellers to exchange underlying assets at predetermined prices on future dates. Futures are frequently utilized for hedging purposes, allowing traders to mitigate risks associated with price fluctuations. In forex trading, futures are akin to forwards, offering the ability to speculate on currency pairs at fixed future dates.

In both forex and futures trading, there are multiple ways to engage in the market. For forex, traders can opt for spot trading, where transactions occur immediately, or explore options trading, which grants the right (but not the obligation) to buy or sell currencies at predetermined prices in the future. Futures trading offers similar versatility, enabling traders to choose from various markets and adopt either long or short positions based on their market outlook.

It's crucial to note the distinction between day trading and position trading. Day traders typically engage in spot forex trading, capitalizing on tighter spreads but incurring overnight funding charges. Conversely, position traders often gravitate towards futures trading due to wider spreads but the absence of overnight fees, aligning better with their longer-term trading strategies.

Both forex and futures trading offer unique benefits and risks. Forex trading provides access to a vast array of currency pairs, while futures trading extends to diverse financial instruments beyond currencies. Leveraging allows traders to amplify potential profits and losses, but it necessitates prudent risk management strategies to mitigate adverse outcomes.

In summary, forex trading encompasses a broad spectrum of trading methodologies, including futures trading, options, and spot trading. Futures, often termed forwards in forex, enable traders to speculate on currency pairs at predetermined future dates. Both forex and futures trading offer avenues for traders to capitalize on market movements, albeit with distinct characteristics and considerations.

Forex vs futures trading: what’s the difference? (2024)
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