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maxr

Spot FX Vs CME FX Futures

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I'm trying to decide whether to trade spot FX or trade CME Futures. I'd appreciate any comments on how accurate or otherwise the current info below I've picked up is:

 

Spot FX:

UK and Euro brokers are regulated, US brokers less so. Few US brokers have segregated client accounts, all UK and many Euro brokers do. Lots of instruments and cross pairs - we're told some are very liquid, but unless you have a true ECN account (or similar) showing volume, you can't you tell what liquidity your broker can provide. Some spot FX brokers widen the spread radically at news times, run their clients' stops, shut their servers off at FOMC time, and requote orders. All this can make short term trading difficult on e.g. 10-15 min charts and news trading impossible with those brokers.

 

CME FX Futures:

Less instruments available, and only the 'big six' CME pairs against USD (GBP EUR AUD CAD CHF JPY) have big liquidity - but I'm told each of these has more liquidity than any one spot FX broker/market maker can provide on the pair (true or false?). You can trade with direct access in the open market, not through a trading desk - so no requotes (instead, 'no fill' or slippage on market orders if liquidity is thin), and your broker alone can't run your stops. Limited Level 2 style volume info available, so you can see market liquidity, support and resistance within 5 price levels up and down. Very tight spreads which don't widen so much on news, so better for short term trading. It can be cheaper pro rata to trade full contract size futures than full lots of spot FX (I don't know about Minis). Brokers make their money on futures mostly from fixed commissions, so they have less incentive to play games against you. Cross pairs have much less liquidity, as do Mini contracts.

 

This leads me to prefer the Futures - is this a fair view?

 

Specifically:

 

a) Do any of you day and swing trade Mini FX futures successfully? If so, which please?

 

b) Does anyone here successfully day and swing trade CME Futures cross pairs, e.g. EURJPY or GBPJPY?

 

c) Do any of you do fast low volume news announcements trades on CME FX futures, if so, on which pairs have you had success please?

 

Thanks, Max

Edited by maxr

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First, well done with your comparison. I think you did a really nice job of laying out the differences.

 

I would agree with your spot FX comparisons, though I think you can feel very secure with US regulated accounts from the main US brokers. There really has never been a problem with those -- it's always been the brokers who were not licensed in the past that had issues. The US does have some additional restrictive rules on the type of trades you can place so that is another difference -security of funds I feel will be similar. Totally agree though on the liquidity and executions. Repricing happens at all these brokers and it can be a problem in fast moving markets - some are much worse than others.

 

Agree on your CME FX assessment so I'll answer your questions.

 

a) Do any of you day and swing trade Mini FX futures successfully? If so, which please?

 

I only trade the full size and so far that has been the BP and EC. I plan on adding the USDJPY to the mix since volume looks good, but so far in all cases feel there seems to be best volumes on the full sized and not the minis but maybe someone else can step in and defend using the Mini FX futures.

 

b) Does anyone here successfully day and swing trade CME Futures cross pairs, e.g. EURJPY or GBPJPY?

 

The ones I trade are mentioned above but have been keeping an eye at expanding this since the volumes really do continue to seem to grow so I could very much see trading the EURJPY futures.

 

 

c) Do any of you do fast low volume news announcements trades on CME FX futures, if so, on which pairs have you had success please?

 

So far I have focused on trading during the European market hours - I get better results than the US market hours -- US seems more unpredictable and the European seems steadier with the moves -- less whipsaw. Perhaps my favorite block of time is 2am EST - 5am EST.

 

MMS

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My 2 cents....

 

Depends on your style really. Forex is an inter bank market which basically means you've got no depth of market so you can not base any of your trading on what is actually trading, which is what being a trader is about. The prices that are quoted by your FX broker is different from what the banks are quote them, which is where they make their money, hence very tight spreads and no commissions. Basically it's risk free money for them.

 

If you trade the currency futures, you've got all the information you need to trade consistently day in day out. You've got full depth of market on the book and are available to see everything that is trading at each price, which allows you read supply and demand around s/r levels as well as reading when price is being malnipulated, which inturn gives you more sustainable trading.

 

Forex = Playing poker when you have no idea how many people are sat at the table, no idea who's calling, who's folding, betting or raising, and no idea who's bluffing.

 

Futures = Playing normal poker with a load of people who don't know how to play...

 

Different strokes for different folks, but i know what i prefer...

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Thanks Guys:

 

MadMarketScientist: what timeframes do you use with the early European sessions? I know a guy who trades the European open from 01:30 EST /06:30 GMT on short 3 minute and 86 Tick charts - he's trading the opening moves with a 'seat of the pants' technique on bare charts (which he's very good at). I'm wary of getting caught with the wrong timescale charts and big opening moves that sometimes correct - 60 points up and 60 back down in 40 minutes shows as a doji on a 60 minute chart...

 

86834 - with a TradeStation account I get 5 levels of Bid volume and 5 levels of Ask volume on CME FX futures. Is that as much as is available for CME FX Futures, or just what TradeStation choose to display?

 

Thanks, Max

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Is depth of market really an edge? I found it distracted. I only care about the spread.

.

 

Depth of market is yet another thing to watch, but as a relative beginner, the way I see it is that it gives me some comfort to know that e.g. someone has suddenly offered out another 50 contracts 3 pips up from where I was thinking of buying in - do I want to buy into that resistance, or wait to see if it's pulled off or bought up piece by piece before entering? OK, they might just be faking, but at least I can see it. 5 levels of market depth each way isn't much compared to e.g. NASDAQ Level 2, but it's something. Say you want to get in quick and buy 4 contracts at market but there's only 1 currently offered on the inside and 6 one pip up - are you likely to get more slippage than if there's 15 available at the inside bid and 67 one pip up? Spread is important, but I feel that in the end it's the prices you enter and exit at that really matter, and for me, market depth gives some insight on that at the although it probably is a distraction. Am I making too much of it?

 

I guess my gut feeling about normal spot FX brokerage accounts is that it's like playing cards with a banker who can see all the hands - it might suit him to play with you or against you :-)

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maxr,

 

Your analysis of the differences very well done. I trade currency futures exclusively because I only trade the majors with full lots. I have traded both spot and futures and find the primary difference is whether you need the size in the crosses and whether the 1700 -1759 (Eastern) downtime is an issue for you.

 

As to the size in the book, many misinterpret what the size off the inside market is. Those are normally hedgers (even FX brokers hedging in the futures market) and really does't mean much.

 

I have worked for several hedge fund/prop trading firms and contrary to popular opinion, we can easily hide the sizee of our orders by either shredding the order (breaking it into very small orders, often 1 lots) or by working the order (entering in a band of prices rather than a specific price).

 

I have a term I use "unit of the gods" referring to what size move catching the attention of an algorithm. For the large players in the 6E (EC to TradeStation folks), that number is somewhere around 20 ticks and for huge macro players it is 50+ ticks.

 

That means the rest of the price movement is simply noise to them and if you are good, you can move in and out of those bands kind of like a speedboat moving among oceangoing ships. You can turn a lot more quickly then them but you have to watch out for the wake.

 

All in all, if you can trade a full lot on the CME, that is the place for the smaller player in my opinion.

 

I hope this helps.

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I thought I would quickly add my two cents since I started day trading in Forex...

 

As far as needing to see depth, it all depends on ones strategy. Personally, my strategy has no need for depth and/or volume. I just need to know where price is now and where it has been. So this may or may not be an issue.

 

There is the option of going through a broker that does give you quotes without games and just charges you a commission (e.g. MBTrading).

 

There are some great advantages to Forex such as precise money management for those with smaller accounts.

 

It just comes down to what you need and want. But don't believe any blanket statement and always do your own due diligence.

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If watching the futures volumes, depth and spread is an issue then all you need is the data. Data varies between cheap and free.

 

I can chart a futures market and its data with Sierra Chart while trading a futures or forex market so that really becomes a non-issue.

 

The real issue then becomes spread, costs, moves and how much you trust your forex market (or distrust it but understand and enjoy any games played). The depth, spreads, and slippage of the IB forex ecn are excellent; much better than futures at the edge of market hours so as someone who trades short term in the 6am GMT to 9:30 GMT market setup games I pick cash over futures.

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If you are not sure about your fx broker reliability, trade futures. Personnally I trade both Fx and futures and, actually, more and more on forex directly rather than futures. Why?

1. Because my broker (saxobank) uses very tight spread often no more than 1-2 pips on major pairs, so no difference with futures

2. Because, and that might be my main reason, with forex I can really have a better entry and exit management: example, I choose to enter with 150,000 EURUSD then will exit at such level with 75,000, then if lucky another 50,000 at a higher level (long position), etc. I can't do this with futures: with those I am obliged to buy/sell a round number of lots. For those willing to "bet" large it is ok but....

Additional note: I tend to definitely avoid news release time for trading both Fx and Fx futures...

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If watching the futures volumes, depth and spread is an issue then all you need is the data. Data varies between cheap and free.

 

I can chart a futures market and its data with Sierra Chart while trading a futures or forex market so that really becomes a non-issue.

 

The real issue then becomes spread, costs, moves and how much you trust your forex market (or distrust it but understand and enjoy any games played). The depth, spreads, and slippage of the IB forex ecn are excellent; much better than futures at the edge of market hours so as someone who trades short term in the 6am GMT to 9:30 GMT market setup games I pick cash over futures.

 

Very good points Kiwi!! I am trading E/U through MBTrading at this very moment, and the spread has consistently been < 1 pip. They have no need to "play games" because they make their money through commission. Yes, there are bucket shops out there that play games through their quotes and software, but you aren't required to trade through them. As for trading news, one has to remember that we are dealing directly with currency so any scheduled news/figure announcement is going to have a much quicker reaction since the banks will reflect the change on a dime.

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Thanks for all that info guys:

 

ScottB - how do you deal with the evening shutdown on CME? If the issue is how to avoid price gapping over stops when it reopens, I guess not trading something that needs a tight stop through the shutdown would make sense?

 

Hlm and Kiwi - thanks for the info on MB and IB. Are these systems truly 'no dealing desk/no requotes', and how have you found them at news times? From their website, it looks like IB routes any trade over $25K through their ECN style system and anything below through their small trade system.

 

Max

Edited by maxr

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maxr - Yes, not trading anything with tight stops is an option but remember, price could move a big figure during that time given the right circumstances (some sort of shock Sigma X type event).

 

Also, with my broker (Velocity futures), the overnight margin kicks in if you hold over that gap in time. Their day trading margins are always in effect as long as you do not hold open positions during that period.

 

While I would never magin myself to that point (equivalent to 250:1 in the cash market), the other end of the spectrum would be full CME margin.

 

As I said, if you are going to hold a longer term position, you should probably be in the cash market.

 

Scott

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maxr - - I'm using a 300 tick chart now on the BP -- I'm trying to capture a little larger move than the person you know who is using the 86 tick -- I did look at 377 tick but felt I needed a bit more frequency and bars to catch some of the quicker moves. Of course some of this depends on your system -- I have another approach that has less trades triggered so on it I'd likely use a 233 tick to get a faster chart and enough trade opportunities.

 

 

 

Thanks Guys:

 

MadMarketScientist: what timeframes do you use with the early European sessions? I know a guy who trades the European open from 01:30 EST /06:30 GMT on short 3 minute and 86 Tick charts - he's trading the opening moves with a 'seat of the pants' technique on bare charts (which he's very good at). I'm wary of getting caught with the wrong timescale charts and big opening moves that sometimes correct - 60 points up and 60 back down in 40 minutes shows as a doji on a 60 minute chart...

 

86834 - with a TradeStation account I get 5 levels of Bid volume and 5 levels of Ask volume on CME FX futures. Is that as much as is available for CME FX Futures, or just what TradeStation choose to display?

 

Thanks, Max

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I don't know which country you trade from. One of the tax benefits in the states is futures are a 1256 contract. So you get 60% as a long term gain and 40 as a short term. Forex spot is straight up personal income and not investment income.

 

I have one question say a trader decides to buy 1million eur/usd what is the proper equivalent for that in the futures market. 10 Eur contracts? Likewise for gbp/usd?

 

I ask because if you trade spot in preset lots how do you adjust to get similar trade sizes in the futures?

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What would be an interesting test is to run the same method/strategy on the EURUSD in the spot, and take same trades/same time using the CME FX Futures. I wonder if anyone has ever done that and reliably reported on it?

 

I gotta put that on my 'to-dos' if not since it would be fascinating to see in the end which ended up being preferable.

 

MMS

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I trade both and i think they both have their pluses and minuses. Depends on what you prefer and what you are looking for when trading. The key though is to get good charting when trading futures and Spot. I use MF Global for Futures and GO Markets MT4 for Spot. B oth offer really good charts,

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I'm sure it's been mentioned but if you're a small account trader the Spot FX is going to be favorable since you can get started easily with $1K for example and that's not the case for the futures markets. That might be a deciding factor for some as well.

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Was wondering.

In US leverage for forex is 25:1 or 50:1 - cant remember specifics.

 

But when trading CME fx contracts - are the 'good' brokers allowed to give high leverage / better than ?

 

ie. was the plan all along to keep CME retaining its importance ?

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First, well done with your comparison. I think you did a really nice job of laying out the differences.

 

I would agree with your spot FX comparisons, though I think you can feel very secure with US regulated accounts from the main US brokers. There really has never been a problem with those -- it's always been the brokers who were not licensed in the past that had issues. The US does have some additional restrictive rules on the type of trades you can place so that is another difference -security of funds I feel will be similar. Totally agree though on the liquidity and executions. Repricing happens at all these brokers and it can be a problem in fast moving markets - some are much worse than others.

 

.........

 

Are you kidding me about USA forex brokers? As of right now, USA retail forex account holders have ZERO protection when it comes to safety of their deposits. If you have been following the PFGBest debacle, both futures and forex clients initially stood to lose everything. Of course, futures had mandatory segregated accounts but forex accounts didn't. During the bankruptcy proceedings, it was discovered that PFG has some 40 Million of forex and metals customer funds that were actually in tact in one of PFG's client assets accounts designated for forex customers. However, the trustee in charge of the bankruptcy asset disbursal doesn't care, and wants to begin distributing that and other assets solely to futures clients, who legally had segregated funds (and therefore preferential creditor standing). A small group of forex traders are not taking that lying down and are now suing the trustee to halt those payments and return them to forex clients. Yes, it's that deep.

 

The CFTC has been avoiding this issue for some time now, despite a very large outcry from the forex trading community. Futures market makers have every reason to sabotage retail forex growth, as the flexible position sizing + leverage available in futures put the retail trader at a very large advantage and it wouldn't have taken long for the trader to be out of his mind. The CFTC must really think retail forex traders will just 'get over it'.

 

Canada, UK, Australia, and several other jurisdictions all offer either segregated accounts or insurance against brokers misusing client funds or in case of broker insolvency (PFG Canada clients aren't going to lose a dime, according to the most recent report).

 

Was wondering.

In US leverage for forex is 25:1 or 50:1 - cant remember specifics.

 

But when trading CME fx contracts - are the 'good' brokers allowed to give high leverage / better than ?

 

ie. was the plan all along to keep CME retaining its importance ?

 

50:1 in the USA, which I suppose is better than Canada and Japan (25:1). It had a lot to do with speculation in retail currency, not 'protecting the trader'.

 

In futures, a broker can in fact lower leverage to whatever they want to give the client. You often see day trading margins that are 1/2 or more of the exchange recommended minimum. The broker can post the minimum to the exchange, but agree to give you a lesser requirement.

 

I think there were several things going to keep retail forex unattractive. CME and other exchanges being threatened by an overtake of competing, more flexible product is one. Certain gov't forces wanting to prevent over-speculation against the USD currencies is another. Stopping the flow of money from going overseas is a 3rd (Frank-Dodd scared off offshore brokers). Retail forex is definitely having its growing pains in the USA right now.

 

Would you, seeing what recently happened with MF Global and especially PFG Best honestly recommend depositing a large sum of funds with a CFTC regulated broker?

 

edit: That pending court case is going to be precedent-setting. Keep an eye on it if you are interested in retail forex in the USA.

Edited by 4EverMaAT

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