Hi,
Can Forex futures give an indication on how the spot market will perform?
I have seen that some brokers offer Forex futures graphs, what I want to know is can looking at these help me predict what the currency will do in the Spot market and why? If so what should I be looking for and on what timescales?
Thanks for any advice
Kev
For the most part, they trade virtually the same. some people use forward futures prices to determine long term market bias.
I don’t. I trade them like they are spot…except withthe advantges of a centralized exchange, no “spread”, all of my trades I pay less than the equivelent of 1 pip “spread”, and my taxes are much lower with futures.
but, unless one has a minimum 10K account (if they are very very good), or more realistically, a 25K account, it’s not worth trading.
To use them to effectively time a market turning point in spot? basically useless.
Jay
Thanks for that but I don’t understand why both markets should almost be the same? Can anyone explain this to me please? My understanding is that a future is an agreement to exchange one currency for another at a date in the future. Say for example most people who trade futures believe that USD may rise next month so they would use futures to buy USD at todays price? Could I find this out by looking at futures charts? If so would this be an indication to buy on the spot market today?
Thanks
Kev
Kev… for example, the futures prices for gbp/usd spot and gbp/usd futures for the december exipration contract is about 2 pips different (futures are 2 pips cheaper)
So, this gives you an idea of what the projected value difference between the dec-2011 expiration contract, and current spot price is.
so, the idea is, as we grow closer to the third friday in december (futures expiration day), they will be the same value on that day.
you have to remember, nearly all value is priced in now…for what is expected later.
right now, aud/usd dec-2011 futures is about 25 pips lower than current aud/usd prices. But… if aud/usd moves up 99 pips this coming monday, you can expect the aud/usd futures to move up about 100 pips. this would bring the futures contract about 1 pip closer to the current spot contract.
and again, on expiration friday in decmber (3rd friday of he month), the price of spot and this futures contract will be exactly the same.
so, in this way, i guess you can say that aud/usd spot prices are expected to decrease over the next 6 -7 weeks… but only by a total of 25 pips…so…it may decrease about 1 pip a day lower than it would without the influence of the futures contract.
Keep in mind, that if we rip up a hypothetical 300 pips between now and then… you could speculate that the move SHOULD HAVE been valued at 325 pips…but that last 25 pips was the difference between future expected value and current price.
Basically man… u can get a vague idea of whether the general market thinks the price will be higher or lower in 3 months, 6 months, 1 year, 2 years…etc… but by the time that moment arrives, the overall change in price will nearly always be several orders of magnitude larger than the differnece in future expectations.
As in. if, for some crazy reason, aud/usd STOPPED TRADING COMPLETELY until the december expiration date in the futues contract. you could expect either the futures value to rise 25 pips…the spot value to drop 25 pips…or some combination thereof.
But the market DOES trade…fluctuations of over 100 pips a day is the norm, and with such fluctucations, trying to squeeze out a tiny 25 pip edge over 6 weeks is going to be a worthless appraoch. not to mention that it’s possibel that the futures values could INCREASE 25 pips.
I suppose you could go long 1 futures contract, and short 1 spot contract…hmm…now there’s an idea ;). but, you’d tie up a fair amount of capital to do so…and would have to wait about 7 weeks to cash out 25 pips. Still a potentially workable arbitration model…but, something tells me there are flaws i’m not seeing there… or else, as they say, its so easy, everyone would be doing it 
food for thought…
Jay
Welcome to babypips lol
ERE has it correct as far as charts are concerned. You are not really going to predict much on a futures chart that is not on a spot chart. Now one thing ere did not mention is you can use the futures market to get an general idea of market bis in spot forex. It is in the cot report released every Friday at 3:30 est. that report can be found on the cftc web site for free. It will tell you how many contracts big money is long or short or spread betting. The report has alot of information on it and can be hard to understand. But it will tell you long or short of you dealers, institutions, and leveraged market players. I will not tell you how to figure out what the data is saying as I am still working on it. But I can say it is very good at telling you the direction of the upcoming weekly candle. If you are like me and trade the daily, 4hr, and 1hr charts knowing the direction of the weekly candle can be very very useful information. So there you have my answer the cot report is based on futures and options and is very good at telling a story of directional bias in spot markets. As far as charts not so much.
Ere I seen you brought up taxes and I have no doubt you can give me a little advice on where I can find info on taxes or should I just go to a tax pro. As this will be the first year I have made any real money in both spot forex and futures markets. I am assuming uncle sam is going to want to talk to me in the next few months. (sorry I know this is not the point of this thread but is important as the year is coming to an end.)
Thanks very much for your reply bobmaninc,
I had actually heard of this report before but didn’t really understand what it was. It sounds like it’s exactly the sort of indication I was hoping to find by looking at the futures graphs, but I was looking in the wrong place. I’ll definately try to learn how to use this to trade.
I can see that it shows commercial long or short, then non-commercial long, short or spreading. I’m assuming that if there more long than short then it is likely that the weekly candle will be an increase? But which type is the best indicator here? I’m thinking commercial? Just I notice the in many cases commercial has more long than short but that non-commercial has more short than long. Who is correct in general?
Thanks
Kev
I first was looking at the commercial and non commercial traders. Then I found you will get better results by looking in Current Traders in Financial Futures Reports: section the the report. CFTC Commitments of Traders Short Report - Financial Traders in Markets (combined). I was not going to say anything as I am still working on past data to check the accuracy of how I look at the data. What I do is I look at the dealer section and figure out what percent is long and what percent is short. I do the same for the institutional section and again for the leveraged. I dont do the other or non reportable section but you can if you want. Now you have the average long or short for that currency. I do it for all the major currecies. After I have all that I let just say you want to know weekly bias for EUR/USD you would take the average of EUR longs (in this case it is 53%) and USD short (40) and get the average of that (47%) so the probability of going long for the week is 47%. Now take the EUR shorts (47%) and USD longs (60%) and average them together (53.5% I round it to 54%) So the probability of next weeks weekly candle on EUR/USD has a higher probability of being a down candle. So if you might want to look to go short in accordance with your strategy. I do that for all the pairs I trade. I have seen the averages stay close to 50% for the most part but do tend to go with the weekly bias. With exception of EUR/JPY and GBP/JPY last week my bais was down and if you look at the week bias was down but with JPY intervention in the beginning of the week they wound up being a higher candle for the week. Now to answer you question on commercial and non commercial you have to understand what they are and to put it shortly non commercial tend to be on the correct side of a trend untill the reversal and commercial traders tend to be on the wrong side of a trend untill the reversal if that makes sence. Look up a book called sentiment in the forex market. It will explian why that is better than I can. If you cant find it I got it free as an ebook and can send it to you.
Hey,
Thanks for that I am very interested in finding out more about this so please keep me posted on how your getting on. I will be doing some investigations my self, if it helps I found a chart for the COT that can show all the different futures and updates when the report comes out.
Many Thanks
Kev
I checked out the chart. It is ok but the problem I see with it is it show how many contracts are owned by large speculators and small speculators but it does not state weather those contracts are long or short. I will assume that they are showing long positions. If that is the case how they are calculating the info is incorrect. I wont comment on EUR chart that you sent the link to as that one was correct barely. However if you look at the aussie chart. It shows a rise in contracts but the weekly candle went down. I have made my own calculations and a chart on excel that is similar to there chart as I only plot long positions however I get my data from a different area of the report. I find my calculations are far more on point than what they have there. What might be making the difference is I use averages on total long and short instead of total positions. Also where I get my data on the report (the link I sent in my last post) way down by the bottom of that report also show positions on the US dollar witch is also figured into my calculations. So far I have gone back to most of the way through 2009 and my calculations are so far 92% accurate. Now it is honestly more accurate than that but for some reason EUR/GBP seems to be consistently wrong if I have not figured out why it works for all other pairs. It also is wrong when the yen interviens in there pairs but if my calculations say to short the pair and the yen decides to spike the pair to the moon. If you actually at the lower time frame charts the bias was correct but it just could not overcome the spike. I should be done soon I plan on going back to when the COT report first came out with is sometime in 2008. Then I will post my charts I got to play with excel a little more so I dont post a bunch of useless info on here and make my chart hard to read. I am a complete newb when it comes to excel but I am getting better with it so stay tuned. I will post it on this thread and my thread (questions on the cot report) if I can find my old thread yours just got bumped. Mine I had asked questions about the report and nobody helped me witch is cool I found my way anyhow as I always do. Just had a few more bumps in my path. I am very persistent and I will find what I am looking for.