Futures and Forex Guide


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If you are reading this you are probably familiar with stocks either as an investment or as an active trader. Lesser known is the world of futures and forex trading. Here, we list reasons on why you should consider trading these financial instruments in lieu of or in addition to stocks and how to trade these financial products. To the second point, while most of the basic guidelines for trading futures and forex are the same as trading stocks, there are key differences.


Top 5 Reasons You Should Trade Futures and Forex


 Great trading opportunities both ways. Does not happen every night but it is a great trading opportunity when it does happen.

Great trading opportunities both ways. Does not happen every night but it is a great trading opportunity when it does happen.

  1. Open 23/5. Futures and forex trade around the clock unlike the stock market. Most futures like gold, oil, and index trade from 6:00 PM EST to 5:00 PM EST with a one hour break Sunday night to Friday evening. Forex is 24/5 on the same schedule but with no break. To be fair, most of the movement outside the traditional US Equity market hours is limited, there are still trading opportunities.
  2. Leverage without the decay. You can make large gains without significant capital commitment. For example, /ES or SP500 futures require as little as $400 day trade margin. That means you need to maintain $400 in your account per an open position. Each tick is $12.50 per a contract so you can see how that adds up very fast. However, leverage cuts both ways so it isn't recommended to take on that much risk if you are not a seasoned trader. And unlike options, there is no decay associated with futures or Forex. Pick a direction and decide the number of contracts or dollar amount. That's it. The difference is that you can lose more than your initial investment although most brokerages will automatically stop you out of your position if you fail to maintain enough capital in your account after any unrealized losses.
  3. No Pattern Day Trader rule. Stocks and options are regulated by FINRA but futures are regulated by National Futures Association (NFA) Commodities and Futures Trading Commission (CFTC) so there is no such rule on the number of day trades. As long as you are willing to pay brokerage commissions for each trade, you can make and close as many trades as you want. Options players should know that options on futures exist as well. Forex is more decentralized and even less regulated.
  4. Liquidity. Unlike most stocks, futures have much deeper liquidity and a tight spread. This is not true for every commodity but for the most popular ones like index futures, metals, natural gas, and oil, the spread will be 1-2 ticks at most. It would take much greater capital than most non-institutional traders have in order to run into liquidity issues. The market for Forex in pure dollar amount is even greater. Although during non-US sessions, volume and liquidity can be sparse, it is still much better than stocks if you are looking to trade outside the 9:30 AM to 4:00 PM EST hours.
  5. Trade both ways. Unlike stocks, futures and Forex can easily be traded both ways without additional fees or access to shares. Even some of the biggest brand name stocks can be difficult to short depending on the brokerage. This is especially true for small cap stocks. In addition, some brokerages will assess fees for short selling while other brokerages will not allow shorting certain stocks unless the capital held in the trading account is substantial.

Getting Started


Unfortunately, many of the free brokerages do not offer futures or forex trading. The reason is that most of the commission fee is going to the exchange so that even if a broker were to give free trades, there would still be a hefty fee that adds up as more trades are placed. The exchange fee is similar to the SEC fee that even free brokerages like Robinhood charge. Instead of being measured in pennies, it is measured in dollars, usually $2 - $3 per a trade depending on the futures product. For forex, the story is a little different. Some brokers like Interactive Brokers charge commissions based on trade value, some charge fixed fees, some charge bid-ask spread as the commission fee, and others like ThinkorSwim give you a choice for fixed fees or the bid-ask spread.

If you have an account with one of the larger brokerages, such as Interactive Brokers or ThinkorSwim, then great. All you need to do is go into your account settings and enable futures/forex trading. You may have to contact them but it is relatively straightforward.

On the other hand, if you are looking to open a new one, there are a plethora of options but we can recommend Ampfutures for the lowest commissions with no platform fees and mobile app access.

 It's always best to keep your commissions and trading fees to a minimum without sacrificing access to desktop and mobile platforms.

It's always best to keep your commissions and trading fees to a minimum without sacrificing access to desktop and mobile platforms.

The story is a little different for forex brokers. We recommend ThinkorSwim or any of the large brokerages because the forex market is more decentralized than stocks, options, or futures markets. This means certain currency pairs will have a wider bid-ask spread during different times of the day, causing you to pay higher commissions if that is the commission structure. It also means different brokers will offer different spreads even for the same currency pair at the same time of the day. So discount brokers in this case could actually end up costing more.

 You have a choice between commission-based and commission free.

You have a choice between commission-based and commission free.


How To Trade

It is recommended you stick to the hard commodity futures, index futures and major currency pairs, at least in the beginning because those have the best liquidity and analysis coverage. 

 Perform your own analysis on oil shipments.

Perform your own analysis on oil shipments.

Trading future and forex is a little different than small-cap stocks in that it takes time for big moves. In some ways, there are more bear and bull traps so intraday plays on big leverage can easily go awry. It is important to perform analysis on the appropriate time frames. The amount of time you plan on holding a position needs to be proportional to the time frame on which you perform analysis. Futures and forex are more similar to crytocurrency in that regard and options (although there is no issue with decay). One thing to keep in mind is that futures have expiration dates. If you want to keep your position, you would need to roll forward your position. All that means is closing the current position and opening the next month's contract. This is not an issue with forex.

 The 1-min chart does not give any indication for this drop.

The 1-min chart does not give any indication for this drop.

Many successful traders use Elliott Wave theory. Although there is a joke that if you put 20 different Elliot Wave practitioner's in a room, you will get 20 different wave counts, the principles such as risk management and getting of the trade if it is not moving as you expect, are all sound practices. Trend lines, technical signals apply the same way as to trading stocks. Trading in the direction of the trend and knowing when the trend has change is key to success. While some small-cap stocks can reverse direction within hours, it is rare for commodities and forex to change trend in such a small time frame.

With all the benefits we listed for futures and forex, your account can grow quickly when you make the right trades and respect risk management when you do not. This means it is important to properly capitalize your account and not take on too much leverage. Otherwise, you will easily get shaken out of the trade for fear of a margin call.

If you think your trading style fits, join us today for up to date discussion and trading ideas.