Potential futures system?

Isn't there a potential system in the differential/correlation between spot and futures prices?

Let's say wheat prices are in contango, couldn't you calculate the differential between the spot and November (or whenever) prices and place a buy on the spot price and a sell on the future if/when a substantial differential exists?

The theory in my head is that these prices may well go up or down but that eventually and especially towards the expiry of the future they would correlate more and more strongly and move towards each other.

I need to sit down and draw up a spreadsheet and chart of spot and future prices over the month before expiry for a few commodities and/or currencies and see how this pans out.

Is anybody else seeing what I am seeing or is this a no go from the start? Input welcome.

I have read a thread about this on another forum and they were using a Broco mt4 which offered futures or CFD futures( and forex of course) and it seemed to work well.

I think the thread owner was reluctanct to open an account with Broco, a russian broker.

Hi Edo, my name is Marco, I'm form Italy.

About a couple of years ago I tought about a system like your, but It remained in my head. If you want we can do some count on excel jaust to see what happens, but I think that It could be a possible interest problem.

Why the euroFX (future on eur/usd) has a different quotation respect the forex eur/usd price?
Because if you go long overnight on the eur/usd forex you gain or pay the interest that your boker charge. So I think there is no chance to have a "free launch"

But we can do some counts on excel. I have the daily eur/usd quotes, and I can ask how many are the interest to pay or gain for overnight position, but I don't have anything for the euroFX. Do you have some historical data (day by day is ok)

I have to admit that where this falls down is which broker you would use. I imagine any broker that sees you trading in this manner on the same broker would cut you off pretty quick but if you used seperate brokers you would have to have a pretty substantial amount in each account to weather the ups and downs of the prices.

My intention, I think, is to monitor the spot/future differential for some of the forex pairs in the last month or two weeks before the expiry of the future and see what happens to the price as it approaches the expiry date. Logically I would imagine that the two prices would come together. Who's going to buy a future way above or below the spot price with 2 days to go? But whether this is actually the case or not I don't know. More work needs to be done.

The other problem I can see is that some of the brokers with which it is easier to trade futures such as IGIndex rollover your trade on a nightly basis and you end up paying the spread every night (albeit alledgedly reduced) which would make holding trades open longer than one or two days unprofitable.

I'm thinking maybe a forex broker who offers a handful of futures cfd's could be useful if they offer no (or little) rollover fee and are fairly reliable to trade with.

Thanks for your post anyway, at least I know other people have had a similar idea.

Hello Marco, thanks for your post. I was thinking of getting the market data and charts from IGIndex and making a spreadsheet and chart of the daily closing prices of spot and futures in the major currency pairs in the run up to the expiry of the future to test whether there is a convergence of prices and what % of divergence would give the best entry.

Also I don't know which broker/s to use, do you have any ideas?

Where in Italy are you? I spent my honeymoon in Sorrento, oh the limoncello! Although I like Strega too, oh the witch!

Ed

This thread may be of interest to you
http://www.forexfactory.com/showthread.php?t=46011

Also this site may be of use
http://www.mfglobalfutures.com/resou...m?page=cspread

Thank you very much.

Hi all,

i try to do some count on excel.
I supposed to buy eurusd forex and eurofx @ close on 06/11/2009.

forex price is 1.4108, eurofx price is 1.4105

on 10/20/2009

forex price is 1.4958, eurofx price is 1.4971

and now?

I have looked into this and found some very interesting results.

I took the closing price of a number of instruments from a well known spreadbetting firm and put them into a chart. First I took the daily close of the spot price and then the daily close of the nearest future price for the same instrument.

Calculating the difference we can see that the futures price exactly tracks the spot price give or take 1 or 2 pips (sometimes up to 12 or 13). The only exception to this was Aud which had a 50 pip differential.

The brokers are obviously wise to my little idea and won't allow hoovering up pips with a nice simple differential system such as I was suggesting.

All of this leads me to think though, what is the point of trading futures with a spread betting firm if all it does is track the spot price by an exact amount every day? Usually they have a 10 pip spread on these things and trading those against trading spot is no different. I believe this is a big scam they are using here. I would be interested in finding out the true futures prices for these instruments from a reputable futures broker and seeing what difference there is.

At the end of the day there is still a system to be had here and that is by trading the differential between futures, or more probably by trading spot price differentials between brokers. It isn't uncommon to find up to a 10 or 15 pip differential in the prices offered by different brokers for the same thing, abeit for short periods of time. To be honest though, you'd need to be really on the ball to trade these differences and who'd be bothered with it? The lower spread pairs such as eurusd are not where the bigger differences can be had and the larger spread pairs would be unprofitable to trade in this way.

Oh well, an interesting idea but no cigar. Thanks everyone for your input.