Futures to Forex

[daytrader14]

I have been trading futures yet I am trying to switch to forex. I am a daytrader and my trades often last no more than 7-40 seconds. A problem I am facing is spreads, even with exceptionally low spreads my cost per round-turn is 10 times what it was in my futures trading account - and often a one tick profit will not even cover what I pay to my broker. So my question to you, forex traders, is how do you quickly enter and exit the market without getting eaten apart by the spreads? Are you simply more careful about when you enter trades? Is there anyone else who has made the switch?

 

[Rhody Trader]

I'd be interested to see an example of what you mean - the difference between trades in the two markets.

 

[meanreversion]

Why are you switching from futures to forex if the costs of trading are higher?

Do you use an automated approach or manual trading?

 

[daytrader14]

I'd be interested to see an example of what you mean - the difference between trades in the two markets.

For instance, if I was to place a trade in the euro futures contract, I can take the bid or offer from the exchange without paying anyone a spread, I then pay something like $.50 per lot (100,000 units) to enter the trade and $.50 to exit (round turn cost = $1). Now in forex I pay a spread on each side of the trade (let's say 1 pip- or .5 pips on each side), so for 1 lot in forex (spot) eur/usd I pay $10 for a round turn on 1 lot. Meaning, I need to make more than a tick just to scratch the trade. So let's say I make 20 trades in both markets, it cost me $20 in the futures, and $200! in the cash. Does no one else find this to be an issue?

Why are you switching from futures to forex if the costs of trading are higher?

Liquidity

Do you use an automated approach or manual trading?

Manual

 

[wackypete2]

Liquidity

There are trade-offs everywhere in life.

Peter

 

[Rhody Trader]

For instance, if I was to place a trade in the euro futures contract, I can take the bid or offer from the exchange without paying anyone a spread, I then pay something like $.50 per lot (100,000 units) to enter the trade and $.50 to exit (round turn cost = $1). Now in forex I pay a spread on each side of the trade (let's say 1 pip- or .5 pips on each side), so for 1 lot in forex (spot) eur/usd I pay $10 for a round turn on 1 lot. Meaning, I need to make more than a tick just to scratch the trade. So let's say I make 20 trades in both markets, it cost me $20 in the futures, and $200! in the cash. Does no one else find this to be an issue?

It is incorrect to say that in forex (or any other market) you "pay" the spread. There is always a spread in every market, and if you're a price taker (meaning you buy at the offer and sell at the bid) then it always works against you. This is the case in futures just as it is in forex. When your futures broker values your position it does so at the bid if you're long, and at the offer if you're short. The same thing happens in forex.

To put it another way, when you open a forex long you don't just hand your broker a pip by way of paying them the spread. That pip spread will reflect in your running P&L (as it does in futures, stocks, options, etc.), but it's not like a commission where the broker takes it out of your account each trade. Your P&L is determined exclusively by where you execute your buys and sells, not how big the spread is. If you get long USD/JPY at 100.00 and go flat at 100.01 you make a pip, even if the spread is 10 pips.

 

[daytrader14]

It is incorrect to say that in forex (or any other market) you "pay" the spread. There is always a spread in every market, and if you're a price taker (meaning you buy at the offer and sell at the bid) then it always works against you. This is the case in futures just as it is in forex. When your futures broker values your position it does so at the bid if you're long, and at the offer if you're short. The same thing happens in forex.

To put it another way, when you open a forex long you don't just hand your broker a pip by way of paying them the spread. That pip spread will reflect in your running P&L (as it does in futures, stocks, options, etc.), but it's not like a commission where the broker takes it out of your account each trade. Your P&L is determined exclusively by where you execute your buys and sells, not how big the spread is. If you get long USD/JPY at 100.00 and go flat at 100.01 you make a pip, even if the spread is 10 pips.

Rhody,

Thanks for taking the time to reply. I am not talking about the natural bid/ask spread which exist in every market, but the ones that forex brokers add on to make a profit. Allow me to restate my question in clearer terms. The problem I am facing is that the price I pay to enter and exit the market is increasing as a percentage of my trade as I increase my trade size, while a commission remains flat. I am curious why this seems to be the only model any reputable forex broker employs and if there are any reputable brokers who will charge a flat rate per trade? I'm assuming there's something preventing this such as the lack of a central exchange, but if anyone could explain it fully I would appreciate it.

 

[pboyles]

I have been trading futures yet I am trying to switch to forex. I am a daytrader and my trades often last no more than 7-40 seconds. A problem I am facing is spreads, even with exceptionally low spreads my cost per round-turn is 10 times what it was in my futures trading account - and often a one tick profit will not even cover what I pay to my broker. So my question to you, forex traders, is how do you quickly enter and exit the market without getting eaten apart by the spreads? Are you simply more careful about when you enter trades? Is there anyone else who has made the switch?

Which futures contracts were you trading? I see your later comment that you are changing due to liquidity issues yet futures such the the ES, Bund and Eurostoxx have excellent liquidity. Trading costs (comms) are about 1/5 of a single tick.

Perhaps you were trading currency futures.

 

[daytrader14]

Which futures contracts were you trading? I see your later comment that you are changing due to liquidity issues yet futures such the the ES, Bund and Eurostoxx have excellent liquidity. Trading costs (comms) are about 1/5 of a single tick.

Perhaps you were trading currency futures.

Yes pboyles, currencies and metals are the markets I trade the most, I do not enter into the es and the like unless it's a very good opportunity.

 

[Rhody Trader]

I am not talking about the natural bid/ask spread which exist in every market, but the ones that forex brokers add on to make a profit. Allow me to restate my question in clearer terms. The problem I am facing is that the price I pay to enter and exit the market is increasing as a percentage of my trade as I increase my trade size, while a commission remains flat.

That's not technically correct. A spread represents a fixed ratio to your trade size (e.g. 1 EUR/USD pip is worth 1/10,000 of your positions size regardless of your position size). The spread itself doesn't widen as you trade bigger, though obviously its value does.

I am curious why this seems to be the only model any reputable forex broker employs and if there are any reputable brokers who will charge a flat rate per trade? I'm assuming there's something preventing this such as the lack of a central exchange, but if anyone could explain it fully I would appreciate it.

Look into the ECNs, which are straight pass through brokers. MB Trading is one, though you should not take that as any judgement either way on my part. While I have seen zero and even negative spread situations happen with the ECNs, most of the time I'd venture to say the spread won't be too far off what you'd see from the bigger market making brokers.

 

[daytrader14]

That's not technically correct. A spread represents a fixed ratio to your trade size (e.g. 1 EUR/USD pip is worth 1/10,000 of your positions size regardless of your position size). The spread itself doesn't widen as you trade bigger, though obviously its value does.



Look into the ECNs, which are straight pass through brokers. MB Trading is one, though you should not take that as any judgement either way on my part. While I have seen zero and even negative spread situations happen with the ECNs, most of the time I'd venture to say the spread won't be too far off what you'd see from the bigger market making brokers.

Rhody,

Thanks again, I also caught my mistake when I said the spread grows larger, I'm glad you knew what I meant though. What I am currently considering is a broker that offers both futures and spot trading, so when I run into a liquidity issue I am not stuck.

So to continue the discussion, does anyone know why the cost of futures is generally less than spot? I'd love to see a detailed explanation if anyone can provide it.

Also, anyone else who trades in both spot and futures, is there any other issues you have run into, anything you prefer about either? I would like this to be as smooth as possible and am curious to hear what other traders have to say.

 

[wackypete2]

Look into the ECNs, which are straight pass through brokers. MB Trading is one, though you should not take that as any judgement either way on my part. While I have seen zero and even negative spread situations happen with the ECNs, most of the time I'd venture to say the spread won't be too far off what you'd see from the bigger market making brokers.

Don't forget if you are using an ECN to trade spot forex, then in addition to the spread you will also pay a small commission to the brokerage, usually representing 1/4 to 1/2 pip. Using your example, MB trading, they charge $2.95 per full contract.

Peter