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Trading forex futures - Why?

  • #1
  • First Post: Jun 27, 2010 2:37pm Jun 27, 2010 2:37pm
So, we know there is the spot forex market as most of us trade it, as well as currency futures, as traded in futures exchange markets like the CME (Chicago Mercantile Exchange).

Now, why would a player in the market trade on the futures instead/as well as the spot market? Perhaps someone have a good enough understanding of market structure to answer me.

If someone has a theory, you are welcome to post here. All the better if you have sources to support it!
“Nothing great in the world has ever been accomplished without passion.”
  • #2
  • Jun 27, 2010 3:09pm Jun 27, 2010 3:09pm
here watch,

I'd say the regulation is a major part of it

http://www.cmegroup.com/education/in...Web/index.html

Also the transparency of pricing.
XAU-XAG/USD_Gold n Silver Trader's Thread = Technicals, Fundamentals & News
  • #3
  • Edited 3:34pm Jun 27, 2010 3:18pm | Edited 3:34pm
Futures is a highly regulated market, you dont have to worry about broker manipulation......shading, unacceptable widening of spreads, stop-running, its really hard to know if your spot forex broker is doing this or not, but trading futures is much more transparent.

Spreads are generally tighter in futures, sometimes even no spread at all during high volume trading, and even with commission costs figured in, overall transaction costs are lower.
  • #4
  • Jun 27, 2010 3:24pm Jun 27, 2010 3:24pm
Essentially you can be the market maker with placing bids and offers.
Similar to how an ECN lets you trade.

Also,
http://www.cmegroup.com/trading/fx/
XAU-XAG/USD_Gold n Silver Trader's Thread = Technicals, Fundamentals & News
  • #5
  • Sep 10, 2010 11:34am Sep 10, 2010 11:34am
I am a futures trader. The reasons listed above are all good reasons. I thought I'd list some reasons I'm interested in spot forex:

1 - ability to size positions according to risk. the euro futures are $125k so you have to trade in these increments

2 - due to #1, one can scale out. say 1/4 position at a time. with futures one would have to trade 4 contracts to do that. Doable on a small timeframe but not on larger timeframes

3 - ability to do micro accounts when starting out
  • #6
  • Sep 10, 2010 12:03pm Sep 10, 2010 12:03pm
I trade both spot FX and futures.

I find that I can keep tighter s/l's with trading futures.

If your long Euro you should be long the EC as well, if the set up is right. Double your money while doing the same chart analysis.

Even though I don't trade the SP minis futures contract, I have a chart of it up at all times. I find that if there is a quick rally in the minis then there will be a rally in FX as well.
  • #7
  • Sep 10, 2010 12:33pm Sep 10, 2010 12:33pm
Your money is not as secure with a spot forex broker; because if the spot FX brokerage firm goes belly up (bankrupt), your money goes with it. Conversely, if your FX futures broker...goes belly up...your money will be returned to you.
  • #8
  • Sep 11, 2010 12:51am Sep 11, 2010 12:51am
Quoting Troikaone1
Your money is not as secure with a spot forex broker; because if the spot FX brokerage firm goes belly up (bankrupt), your money goes with it. Conversely, if your FX futures broker...goes belly up...your money will be returned to you.
Why would the futures broker return your money? The FDIC would insure some of it but if you got a million in there I'm not sure you'd get more than the FDIC amount back.
  • #9
  • Edited 6:00pm Sep 11, 2010 1:23am | Edited 6:00pm
Main reason that I trade Spot Forex and NOT Futures:

1. Easy to trade. I don't have to learn the complex pricing models, their pricing structures and their features like their expiration date of FX Futures

2. No systematic volatities like around "triple witching" time

3. Highly liquid because Forex is money that we use today, at this moment. And since everybody uses money everyday at certain time of the day, its trading should be more frequent and thus higher liquidity.

OTC FX market today is not perfect but it's come a long way. I hope the future of the OTC FX market will be one giant global ECN like the "Island" Order-Matching system for Electronic Stocktrading, where buy and sell Spot FX orders are automatically matched on a first-come, first-serve basis while adhering to order-handling rules and still maintaining the anonymity of all trading parties. So instead of trading with individual ECN brokers like today, all of the brokers will be ECN's who tap into this 24-hour, around-the clock ONE giant ECN called "FX Island" and all we traders have to do is trade on this huge "FX Island" via the brokers! It's simple to use, transparent with market depth for us to see and yet with anonymity of everybody! No more SL hunting, no more requoting, no more missed Limit and SL orders!

Once that huge SPOT FX ECN is set up, Spot FX will be pretty much like futures in terms of transparency and integrity which btw is something that CFTC can easily do something about to monitor if they really want to support Spot FX trading. The bottom line is CFTC wants to support Futures FX rather than Spot FX because there is something in there for them so SPOT FX is always at an disadvantage.

My personal observation and vision.
Make your losses in demo. Earn your profits live.
  • #10
  • Sep 11, 2010 5:49pm Sep 11, 2010 5:49pm
Quoting Forexia
3. Highly liquid because FX is money that we use today, at this moment. And since everybody uses money everyday at certain time of the day, its trading should be more frequent and thus higher liquidity.
bingo. trading futures is betting on the FUTURE price of the currency, not its current price and where that is going to go. its like trying to predict the future's future. if youre cool with that, so be it.

also, margin and leverage. i dont remember too well, but i think you have to keep like 75% plus margin, called maintenance margin. that would mean you would have to have at least 75,000 USD in your account to open 1 lot of EURUSD, and if it went a fraction of a pip against you, margin call time. some brokers would let you add more to the account to keep the position open though.

also, theres not usually a great deal of leverage, sometimes none at all. if youre lucky you'll be trading at 10:1 at the most. that means having to put up most, if not all, of the 100K contract. good luck with that lol.

forex futures are MAINLY used by banks to hedge their current positions (not actual "trades", just the currency they have in reserve). for example, if the bank just traded a bunch of USD for some Euros (buying EURUSD essentially), in the hopes that the Euro will appreciate and the USD depreciate, they might sell some EURUSD futures to hedge their bet. they might even buy a put option contract on that futures contract to sell the forex contract. that way, they dont actually lose much money on the futures contract if they dont exercise the option. they just lose the cost of the option contract.
  • #11
  • Sep 11, 2010 10:18pm Sep 11, 2010 10:18pm
by the way, when george soros shorted the gbp/usd and made 1 billion, he was using spot forex not fx futures......spot forex have the same transparency as fx futures, just that your paying more commission to the broker itself, the key is to pick a commissions broker instead of a fixed spread broker.

if u pick a commissions broker, u have the same transparency as fx futures. So, u don't have to worry about price manipulation. The advantage of spot forex is that there is no expiration date to my trades
  • #12
  • Sep 11, 2010 10:28pm Sep 11, 2010 10:28pm
Quoting blacksun1
bingo.
you are alarmingly misinformed.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #13
  • Sep 11, 2010 11:59pm Sep 11, 2010 11:59pm
The Fool,
would u care to elaborate?
Thanks!
  • #14
  • Sep 12, 2010 12:26am Sep 12, 2010 12:26am
I think Blacksun may be a bit mistaken about the
margin requirements, maintenance margin, and leverage of
currency futures products. Obviously, these vary from broker
to broker....but 2-4% of contract value is probably the norm.

You can get about 1% inital margin for intraday trades on EUR/USD
futures (6E's) with MB trading. Overnight margin and maintenance is higher.

Honest mistake, he did say he "...didn't remember too well."
  • #15
  • Sep 12, 2010 1:58am Sep 12, 2010 1:58am
I think everything you mentioned is completely false.

Quoting blacksun1
bingo. trading futures is betting on the FUTURE price of the currency, not its current price and where that is going to go. its like trying to predict the future's future. if youre cool with that, so be it.
The future matches the SPOT tick for tick, with the exception that it can be slightly offset to account for interest rates for the contract life. Near the expiration they move lock-step.

I participated in a thread here on euro trading and I traded futures while they traded forex. I never saw a difference in terms of breakouts, stop losses, etc. It's amazing how efficiently the futures are kept in line with the spot.

so when trading futures you don't bet on the future price. You are trading the current price. You can get out a second later so all you care about is the current price.

Quote
also, margin and leverage. i dont remember too well, but i think you have to keep like 75% plus margin, called maintenance margin. that would mean you would have to have at least 75,000 USD in your account to open 1 lot of EURUSD, and if it went a fraction of a pip against you, margin call time. some brokers would let you add more to the account to keep the position open though.

I don't remember the exact euro margin but all the futures margins are around $6000 with the maintenance around $5000. The Euro futures are not for those who have a $5000 account. A day's trading range is worth around $2000. Trading on a 5min the stop would likely be around 30 ticks which is $375.

For me this is 1 of 2 advantages of forex - you can trade any size you want. I can handle a $375 stop but I don't feel comfortable risking more than $2k which is why I'm interested in forex. The other advantage is more currency pairs, but you have to watch the spread.

Speaking of spread, in the previous post 2 ticks was compared to $20. But if you're trading a small size (as beginners should) then 2 ticks could be less than the futures commissions.

Quote
also, theres not usually a great deal of leverage, sometimes none at all. if youre lucky you'll be trading at 10:1 at the most. that means having to put up most, if not all, of the 100K contract. good luck with that lol.

leverage is around 20:1 ($125k / margin requirement). For daytrading a lot of brokers have reduced margin. For ES for example the margin is $500. Crude $1000. I don't know what it is for Euro but probably around $1000 so that's 125:1. I personally don't think leverage is a good thing. It's a way to blow up an account really easily.

Quote
forex futures are MAINLY used by banks to hedge their current positions (not actual "trades", just the currency they have in reserve). for example, if the bank just traded a bunch of USD for some Euros (buying EURUSD essentially), in the hopes that the Euro will appreciate and the USD depreciate, they might sell some EURUSD futures to hedge their bet. they might even buy a put option contract on that futures contract to sell the forex contract. that way, they dont actually lose much money on the futures contract if they dont exercise the option....

this is not true. Currency futures are used by any company wanting to hedge a cash position. Importers & exporters for example. Then taking the other side are speculators. So everyone is participating in futures.

Finally, forex is said to be liquid but it has been shown (google it) that the currency futures have more volume than the largest forex dealers. The only requirement is being able to trade a minimum $125k size.

My idea is this: start with forex with a $100 size and work up. Once $125k can be traded (or some multiple of if scaling out is a requirement) then switch to futures. I want to trade a swing trading system. Trading 2 contracts would have a stop loss over $4k. Too big for me.

Finally - please don't spread misinformation. Being incorrect on a point or not remembering is fine but a post full of completely false information isn't going to help anyone here. People should keep that in mind when reading posts.
  • #16
  • Sep 12, 2010 2:01am Sep 12, 2010 2:01am
Quoting sg_trader
if u pick a commissions broker, u have the same transparency as fx futures. So, u don't have to worry about price manipulation. The advantage of spot forex is that there is no expiration date to my trades
For micro size (say $100 or $500) is it better to pay commission or spread? I already have an account at IB. Would it be better to trade forex through them or say Oanda?
  • #17
  • Sep 12, 2010 2:09am Sep 12, 2010 2:09am
Quoting Forexia
Main reason that I trade Spot Forex and NOT Futures:

1. Easy to trade. I don't have to learn the complex pricing models, their pricing structures and their features like their expiration date of FX Futures

2. No systematic volatities like around "triple witching" time

3. Highly liquid because Forex is money that we use today, at this moment. And since everybody uses money everyday at certain time of the day, its trading should be more frequent and thus higher liquidity.
1 - The pricing model for currency futures isn't complicated, it just accounts for interest during the contract's life. if you're trading a single currency you don't need to be concerned with it. The expiration date is every 3 months and only concerns swing traders. It's very simple to rollover, only takes a few seconds. so while it may sound complicated to someone not familiar with it, it's really not complicated at all.

2 - This is true for stock futures but the euro isn't as affected because it's kept inline with the spot rate by arbitrage.

3 - I think futures are more liquid. Forex claims the liquidity advantage but when you trade through a broker the fact is they have less volume than the futures so it's less liquid.

I agree about a forex exchange but the dealers would lose power in this scenario and aren't likely to support it. The ECNs would benefit though and it's be great for traders.
  • #18
  • Sep 12, 2010 2:10am Sep 12, 2010 2:10am
Quoting cunparis
For micro size (say $100 or $500) is it better to pay commission or spread? I already have an account at IB. Would it be better to trade forex through them or say Oanda?
IB's commissions are minimum $2.50 so this makes it unusable for micro trading.

http://screencast.com/t/ZDAwYzlm

I'm still looking for the best way to trade $500 - $1000 size. My plan is to increase size as I demonstrate profitability.
  • #19
  • Sep 12, 2010 2:53am Sep 12, 2010 2:53am
Quoting cunparis
Being incorrect on a point or not remembering is fine but a post full of completely false information isn't going to help anyone here. People should keep that in mind when reading posts.
Merci.

The only advantage spot offers over futures is the possibility for trading very small accounts and the scalability of the trade size.

The only reason I trade spot fx is the scalability issue - I can micro-adjust the size of my trade relative to the risk I perceive at any instant in the market... I can trade for $0.50/pip or $50.00/pip or whatever, depending on how I feel about the trade - I am not limited to the arbitrary "contract" size that is set in futures.

I don't know why the exchanges do not adopt this scalability model - it makes sense in a cash market - we're not delivering boxcar loads of sow bellies, after all. They have tried with the "micro" fx futures contracts, which have a $1.25/tick value - but those have not caught on.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #20
  • Sep 12, 2010 5:36am Sep 12, 2010 5:36am
Quoting Deevz
So, we know there is the spot forex market as most of us trade it, as well as currency futures, as traded in futures exchange markets like the CME (Chicago Mercantile Exchange).

Now, why would a player in the market trade on the futures instead/as well as the spot market? ...
it's very cheap
it's a transparent market
futures br0kers will give you the best they can.
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