FOREX or Futures? The beginnings of modern futures markets lie in the agriculture markets of the 1800's. During that time, farmers began signing contracts to deliver agricultural products at a later date. This was done to anticipate market requirements and stabilize supply and demand during off seasons. The current futures market includes much more than just agricultural products. It is a global market for all sorts of commodities including manufactured goods, agricultural products, and financial instruments such as currencies and treasury bonds. Futures contracts state what price will be paid for a product at a predetermined delivery date. When the futures market is played by the speculators, the actual goods are unimportant and there is no expectation of delivery. Rather, it is the futures contract itself that is traded as the value of that contract changes daily according the markets valuation of the commodity at any given time. In every futures contract there is a buyer and a seller. The seller takes the short position and the buyer takes the long position. The futures contract specifies a buying price, a quantity and a delivery date. In this example: A farmer agrees to deliver 1000 bushels of wheat to a baker at a price of $5.50 a bushel. If the daily price of wheat futures falls to $4.50 a bushel, the farmer's account is credited with $1000 ($5.50 - $4.50 X 1000 bushels) and the baker's account is debited by the same amount. Futures accounts are settled daily. At the end of the contract period, the contract is settled. If the price of wheat futures is still at $4.50 the farmer will have made $1000 on the futures contract and the baker will have lost the same amount. However, the baker now buys wheat on the open market at $4.50 a bushel - $1000 less than the original contract, so the amount he lost on the futures contract is made up by the cheaper cost of wheat. Similarly, the farmer must sell his wheat on the open market for $4.50 a bushel, less than what he anticipated when entering the futures contract, but the profit generated by the futures contract makes up the difference. The baker, however, is still in effect buying the wheat at $5.50 a bushel, and if he hadn't entered into a futures contract he would have been able to buy wheat at $4.50 a bushel. He protected himself against rising prices but he loses if the market price goes down. Speculators hope to profit by the daily fluctuations in the futures market by buying long from the buyer if they expect prices to rise or by buying short from the seller if they expect prices to fall. FOREX or FX The foreign exchange market, FOREX has several advantages over the futures market. FOREX is a more liquid market and as the largest financial market in the world it dwarfs the futures market in daily trades. This means that stop loss orders can be executed more easily and with less slippage in the FOREX. The FOREX is open 24 hours a day, 5 days a week. Most futures exchanges are open 7 hours a day. This makes FOREX even more liquid and allows FOREX traders to take advantage of trading opportunities as they arise rather than waiting for the market to open. FOREX transactions are commission free. Brokers earn money by setting a spread, or the difference between what a currency can be bought for and what it can be sold at. In contrast, traders must pay a commission or brokerage fee for each futures transaction they enter into. Because of the high volume of trading, FOREX transactions are almost instantly executed. This minimizes slippage and increases price certainty. Brokers in the futures market often quote prices reflecting the last trade which may not necessarily be the price of your transaction. The FOREX is less risky than the futures markets because of built in safeguards in the trading system. Debits in futures are always possible because of market gaps and slippage.