Please tell me if my math is correct. EUR future moves at $12.50 per tick which is equivalent to one pip on 125,000 in spot. Assuming 2 pips in and 2 pips out this would amount to $50 spread on spot vs. $4.80 commission and 12.50 in and 12.50 out on the futures contract assuming you give up the spread both ways which you dont neccessarily have to do. 2 pips in and out seems to be giving the benefit of the doubt to most of the forex brokers Ive looked at. . One futures contract margin on EUR at IB is around $1k. Using 20 to 1 margin at a typical forex broker would mean somewhere around 5k for $125,000. You could get the margin down by using 100 to 1 but who wants to do that. All in all the only reason I can see to trading spot is if you are low on funds and want to take advantage of huge leverage. Am I missing something?
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Spot vs. Futures
- Thread starter GaryN
- Start date
Since you asked... both your math and every sentence in your post - except the first two and the last one - are either factually incorrect or omit critically important facts. Yeah, you are missing just about everything.
You generally give up the spread once per trade, not twice... there are sub-1-pip spot dealers for EUR/USD, including IB itself, plus the other commission-based ECNs or pseudo-ECNs, plus Oanda... e.g., @.9 pip $11.25 < $17.30... "benefit of the doubt" - you're not looking in the right places (see above)... $1k is intraday, not overnight, and triggers a margin call liquidation... 20x means around $9k (not 5k) for EUR (not $) 125,000... who wants to use 100x - well, you just did, and more - your $1k futures example is using leverage of 180x - good luck with that... many other reasons exist (see partial list below). Spot v. futures has been discussed here ad infinitum; search and browse.
Trading capital, leverage considerations, skill level / experience, commitment, the place of trading in your life, risk tolerance, safety of principal, dispute resolution, currency pairs, liquidity, trading hours, time frame / frequency, order types, scaling in / out, manual v. API, news role, interest rate relevance are just some of the key factors in deciding whether to trade currency futures, spot (and, if so, where), both or neither.
You generally give up the spread once per trade, not twice... there are sub-1-pip spot dealers for EUR/USD, including IB itself, plus the other commission-based ECNs or pseudo-ECNs, plus Oanda... e.g., @.9 pip $11.25 < $17.30... "benefit of the doubt" - you're not looking in the right places (see above)... $1k is intraday, not overnight, and triggers a margin call liquidation... 20x means around $9k (not 5k) for EUR (not $) 125,000... who wants to use 100x - well, you just did, and more - your $1k futures example is using leverage of 180x - good luck with that... many other reasons exist (see partial list below). Spot v. futures has been discussed here ad infinitum; search and browse.
Trading capital, leverage considerations, skill level / experience, commitment, the place of trading in your life, risk tolerance, safety of principal, dispute resolution, currency pairs, liquidity, trading hours, time frame / frequency, order types, scaling in / out, manual v. API, news role, interest rate relevance are just some of the key factors in deciding whether to trade currency futures, spot (and, if so, where), both or neither.
I asked for criticism because I was not sure about my assumptions. I know IB has tight spreads but they also charge a commission. I havent seen sub pip spreads on the three larger forex brokers that Ive been looking at. Why do you say you only pay the spread once? You do not give up the spread when you exit? I will do a search on previous discussions. Thank you for your input.
Quote from GaryN:
Why do you say you only pay the spread once? You do not give up the spread when you exit?
That's correct. Example: EUR/USD quote is 1.4320/21 --> enter long @market 1.4321 ask.
Quote is now 1.4370/71 --> exit @market 1.4370 bid.
Spot price change = 50.
P/L = 49 = 50-1 = change - spread.