Forex Vs Index Futures

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Some will know I am not a keen forex trader as things stand presently. This is mostly because I started trading on the FTSE 100 index and have not really dabbled into other markets on the whole.

I am constantly surprise how everyone wants to trade the FX markets. Firstly I am always met with the argument that the FX market is the most liquid in the world. It is true that the forex exchange markets turnover near $4trillion a day. However, I am not sure that when it comes to day trading or swing trading liquidity is a major factor.

At the end of the day liquidity only matters when a) the market does not move enough to make a profit and b) when liquidity issues prevent you from entering or exiting a position efficiently. Neither of these are a factor in fx or in major index futures.

I think the real reason why people choose to trade FX is that it’s generic across the world. Indices are often country specific and offer no interest to some traders if they are not in that country. Forex, however, effects every nation and exchange rates are a common denominator between them.

The second argument for trading foreign exchange seems to be the notion that it trades in a bigger range than any other market on a daily basis. A bigger range, in theory, could mean more trading opportunities. For me this is all relative.

As an example, the FTSE 100 futures and USDGBP both have daily range which is about 45-50% of the weekly range. Naturally some would say that cable has daily range (currently for the last few months) averaging around 251 points a day and the FTSE only 100pts. However it’s all relative. The spread on the FTSE   is usually 0.5pts where as cable often has several pips for it’s spread.

If one could trade the FTSE at a smaller decimal level, say to one decimal pace, the daily range would be 1000 points with a spread of 5pts. Doesn’t look so small when viewed that way. Even on a tight range day of 40pts that would equate to 400pts.

The only real difference between the two is that you can trade small fractions in one compared to the other. This difference can be eliminated by varying the trade size. 1 contract on the FTSE would be roughly equivalent to say £5 per pip on cable. Obviously the greater the daily range of a trading instrument the greater the potential profit but also the greater potential loss. So if you multiply the daily ranges of the FTSE 100 and USDGBP by the suggested trade sizes you will see that the potential profit and loss over a daily range is the same.

This is why I do not consider one to be better than the other. Obviously if you are trading on a tight budget and can’t afford one contract on the FTSE futures then maybe fx is the way forward. However, with spread betting firms offering £1pp trade size on index trades these days it has become less of an issue.

Naturally, one might prefer to trade forex because simply they can trade the movements better than they personally can on another market. And I totally accept that. What I do reject is the notion that trading foreign exchange markets are better because they are more liquid and have bigger trading ranges. In my opinion those issues are non-issues and are just based on math manipulation.

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