Hello,
Based on this article: babypips dot com /learn/forex/forex-vs-futures
it is said that the spot market would be more liquid than futures.
However, I recently found another blog post that says the futures market has more liquidity: thetradenews dot com /thought-leadership/dispelling-the-myths-around-fx-futures-liquidity/
I am confused. Could anyone explain?
The spot forex market is the most liquid and actively traded market in the world, dwarfing the combined volume of all the world’s stock exchanges.
Currency futures on the other hand have just a fraction of the daily volume with a lot of this feeding back into the spot market in one way or another. As currency futures are a forex derivative, the currency futures market will always be smaller than the underlying market by its very nature.
You’re not comparing like with like.
The futures market is one you can trade in, as a retail trader with only small funds.
That isn’t true of spot forex. A retail trader with less than $Millions can only bet against counterparties on the price-movements of the counterparties’ own products. Retail “traders” who are “trading” spot are not actually in any real market at all. No currencies change hands.
So the volume/liquidity of the true spot forex market has no relevance.
Thanks for your answers. So if the spot market is more liquid but you don’t trade the actual spot market then in my understanding you also won’t benefit from it in terms of less slippage and faster order execution?
Another question would be if you don’t actually trade the real spot market as a retail trader why do brokers advertise with all the ECN/STP accounts if these orders won’t be matched against other traders in the real spot market?
You’re right.
The terms ECN/STP/NDD are designed to fool naïve retail customers into believing that the party they like to think of as a “broker” isn’t their counterparty and therefore wants them to win, not lose.
Liquidity!
Is it all it’s cracked up to be anyway?
As a retail trader, what volume are you trading anyway? Do you really need so much liquidity? And how do you measure the liquidity in the decentralised spot Forex Market? The only volume measurement available to retail traders is either tick volume (which is incremented each time the price moves a tick in either direction) or FX Futures Contract Volume which is measured accurately and available for all to see. But when it comes to choosing what financial instrument to trade even better still due to the transparency of the market would be ES Mini (S&P500) or CL (US Brent Crude Oil). Both these especially during Regular Trading Hours have more than enough liquidity! And the benefits of open transparent centralised exchange data.
When it comes to slippage, does a little amount of slippage really matter? Especially when it is in the direction of your trade anyway! In addition no matter what you trade, even EURUSD if you trade at the wrong time has slippage. Choosing the right time is key to limiting slippage.
Which do you guys prefer, Spot forex trading or FX futures trading.
Ultimately, your personal preference is all that matters