Currency Futures vs. Spot Forex - Why Spot Forex?

U

UncleJ

Sorry if this has been discussed before. I have been trading spot forex for the past two years and recently became interested in currency futures because of their lower transaction price. The more and more I research it, it became clear that the spot forex market is a big shame setup to take money from new traders through crazy fees (spreads).

The only advantage I can see to spot forex are increased liquidity (which doesn’t matter if you are an average intraday trader) and increased leverage (which is trouble for most new traders).

For those of you who don’t know about currency futures, they are basically the same as trading spot forex but your commissions are a lot less and your money is safer. For example, if I want to open up a position in the spot forex market where my pip value = $25. This would cost me about $100 in spread (if the spread was 4 pips). In the currency futures market, this same trade would only cost me $10. If you make 10 trades per day, you would save $900 each day by trading currency futures instead.

Also, futures brokers are regulated so you wont have to worry about your spot forex broker stealing you money (yes it can happen, just ask Refco customers).

Maybe I am missing something here, but, if you are a small time trader with under $100k account, why would you trade spot forex instead of currency futures?

Thanks
 
Thanks for the links.

From what I can tell, if you are intraday trading with liquid pairs such as EURUSD and GBPUSD, then currency futures are they way to go :)
 
i was looking into that also .I have been trading spot forex for a while But i trade with cmc where euro spread is $20 /lot . What would that be compared to iin futures. Also what i didnt like was the margins where alot higher especially over night. anyway what is the average round trip cost for 1 euro lot $100,000 contract with all the fees?
 
Quote from watchdaride:

anyway what is the average round trip cost for 1 euro lot $100,000 contract with all the fees?
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I pay $2.85 per side, $5.70 r/t at IB. Keep in mind, one euro futures lot equals 125k euro (~$164k USD). Overnight initial margin is $2,295 per lot (~1.4% or 70:1).

You also don't need to pay the spread, your buy order can get filled on the bid on Globex if there's a seller at your price. Conversely, almost every FX broker will not fill you unless you pay the spread.
 
I think that the reason Spot Forex is used is mainly because you can open an account with 1000$ or even less, but it's not the same with futures.
 
Quote from jlpi:

I think that the reason Spot Forex is used is mainly because you can open an account with 1000$ or even less, but it's not the same with futures.
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Without wishing to do through all the old arguments- and both venues have their relative merits/demerits- your explanation is madness.

The interbank spot fx traders tend not to use futures at all. I don't think the reason is they cant open up an account with $1000 so I dare say there are other reasons.

One thing is for sure -liquidity in spot via a reputable ECN is far better than in futures, expecially in fast markets. I dare say one reason for this is that the spot boys support prices via ECNs but not via futures.

Fow what it is worth I have tried both and much prefer spot via ECNs although I still do have an open futures account.
 
Quote from Lon Eagle:

Without wishing to do through all the old arguments- and both venues have their relative merits/demerits- your explanation is madness.

The interbank spot fx traders tend not to use futures at all. I don't think the reason is they cant open up an account with $1000 so I dare say there are other reasons.
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Sorry, but I don't understand why my explanation was madness.

Even if it sounds very unreasonnable, many people want to try forex with just 500$. So what are the choices for them?
 
Quote from Lon Eagle:

Without wishing to do through all the old arguments- and both venues have their relative merits/demerits- your explanation is madness.

True they each have merits but Uncle J's post certainly wasn't madness. The truth is many retail traders choose bucket shops because they can't afford futures.

The interbank spot fx traders tend not to use futures at all. I don't think the reason is they cant open up an account with $1000 so I dare say there are other reasons.

There's funds trading ETF's instead of Index futures. Or Treasury's on Cantor instead of CBOT contracts. Fact is many institutions are prohibited from using futures. That in itself doesn't mean the underlying (spot) is any more or less legitimate than futures.

One thing is for sure -liquidity in spot via a reputable ECN is far better than in futures, especially in fast markets. I dare say one reason for this is that the spot boys support prices via ECNs but not via futures.

I know you look at both Lon (and I respect your opinion on this topic) but surely you agree that Globex is MUCH MORE liquid than open outcry used to be. I can remember even 4 years ago when a big volume day in E6 was 75,000 cars. Now volume is often 4x (no pun intended) that figure.

For what it is worth I have tried both and much prefer spot via ECNs although I still do have an open futures account.

I'm sure you're trading very efficiently Lon but I still think for the average Joe, transparency, access to trade against competing orders, the ability to trade inside the spread and the safety of segregated funds makes futures the compelling vehicle.
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