Sorry for the provocative title, but wanted to hear from those who believe otherwise. In the U.S., it seems that retail investors can trade only the spot currency market. Currency forwards are difficult because of ISDA requirements. Currency futures are difficult because notionals are too large. So that leaves retail investors with spot FX trading. When you trade spot, you don’t have access to the benefits of carry that you do in futures and forwards. Therefore, in my view, retail traders get leveraged exposures to random bets. Assuming they violate the Kelly criterion, they get wiped out quickly.
Are my assumptions correct? If my assumptions are correct, does my conclusion (spot trading is foolish) follow logically? Thank you, and please understand that I’m not saying that those who trade spot FX are foolish, only that the activity appears foolish to me. In Europe, it is much easier to trade currency forwards. Then, FX trading becomes more akin to fixed income trading, rather than betting on which raindrop falls faster down the window. Thank you.
Kelly criterion: suggest maximum % of portfolio to put on a single bet, given hit rate, payout on win, loss amount on loss, etc. By “carry”, I mean FX carry.
Okay, you will be able to communicate your ideas to this audience more effectively if you water down unnecessary jargon. If you care to read some of my early posts you might say that was rich coming from me, but you live and you learn.
I would say no in answer to your question. A few people on here do trade futures as well as other products and markets, I myself trade FX Spot and FX Options but I know what you mean that derivative products are not usually retail friendly.
If you check the Chicago Mercantile Exchange or CME Broker directory > Find a Broker you might be able to find one that does cater for non institutional or ex institutional traders I managed to find a UK regulated broker but I do not currently use them.
Thank you, Forex.com, and you, Ropunzel, for the reply. I’ve never traded FX in a non-institutional setting and wasn’t aware of the rollover interest convention as a proxy for term exposure to FX. Now I think I understand.
In fact, we offer futures and options trading through our FuturesOnline affiliate, so you’re welcome to trade those products through us as well. However, for most retail traders, we believe the benefits are greater with trading spot forex (AKA retail forex), because:
You can earn rollover interest, and your retail forex trading positions are automatically rolled over from one trading day to the next. That means you never have to worry about contracts expiring or becoming deliverable which is a regular issue faced by traders trying to hold long term positions using FX futures contracts.
You have much more flexibility to place smaller orders with retail forex than with FX futures where the standard contract size is 125,000 Euros when trading EUR/USD, and the “micro” futures contract size is still 12,500 Euros. Another disadvantage if you trade micro futures contracts is that you aren’t trading in the same liquidity pool with the standard FX futures contracts. That’s not the case with retail forex where real micro lots (1000 Euros when trading EUR/USD) let you trade in the same liquidity pool as standard lots (100,000 Euros).
There are a lot of ways to trade currency in the US, and available methods for each belief system out there.
If you believe price movement isn’t completely random/If you believe certain setups have a directional bias and higher probability of moving a certain direction
Spot FX - High leverage @ 20-50x | Smaller sizing options starting @ 1k to 10k | Exposure to addition broker added carry costs
Futures - Very high leverage @ 75-100x | Larger Sizing @ 100k | No additional carry costs
Futures Options - Very high leverage @ 75-100x | Ability to control sizing by trading out-of-the-month strikes, can achieving sizing between 10k-50k per option depending on strike selection | No overnight carry exposure
If you believe price movement is completely random/If you trade mean reversion
Options - Lower leverage @ 5x | granularity in the 5-10k range by using OTM strikes | Can trade neutrally(simultaneous short put and call) and profit from options premium. Great for mean random belief/ mean reverting traders.
Futures Options - Very high leverage @ 75-100x | Ability to control sizing by trading out-of-the-month strikes, can achieving sizing between 10k-50k per option depending on strike selection | No additional carry exposure | Can trade neutrally(simultaneous short put and call) and profit from options premium. Great for mean random belief/ mean reverting traders.
I personally trade both directional and mean reverting depending on my bias, either neutral or directional. I trade all of the above methods and so I would argue that life has never been better for the retail trader. Not only do we have access to almost every trading vehicle on the planet but there is a vehicle for just about any market theory.
I don’t think spot is foolish, it is just a tool for directional traders. Just as in construction, there are better tools for certain jobs, so I choose the right tool for the job depending on what I am trying to accomplish in my trade.
That is not the case. You still have overnight carry exposure (AKA rollover interest) when trading FX futures and options. While the rollover interest does not appear as a separate line item on your futures trading account statement, that does not change the fact that rollover is built into the price of the contracts.
The forward interest rate differential (IRD) is priced in to the futures continuously over the life of the contract. Traders who arbitrage between spot and futures make sure of that. You can see this in the daily price fluctuations as the futures price converges to the spot price as the contract approaches delivery.
@FOREX.com you’re right, I wasn’t very clear in my brief points. You are correct that IRD is intrinsic to the futures contract. While they both experience carry, many brokers pad their swap rates in spot FX, which is moreso what I meant. A trader is more exposed to added brokers costs on the swap and daily those extra costs add-up and compound. With most Forex brokers not only are you paying market spread + commissions + broker added padding to the market spread + swap rate but also pay additional broker added padding to the swap rate… Ouch. In addition there is the 60/40 tax benefit to the US trader with futures gained interest versus trading spot. Many traders don’t believe those extra little fee’s matter, but it adds up. Using an expense ratio calculator, a person can see that giving up just 1 extra penny per dollar of profit will wipe out 15% of your gains over 20 years. Depending on how much you gain over 20 years, that could be a loss of many 100’s of thousands of dollars because it’s costing you in both fee’s and a reduction in interest compounding potential.
I am certainly not anti-spot, as it is one of the vehicles I currently use in my strategies, but as I said before it is about using the right tool for the job. If I need more sizing granularity, am taking a short term trade, or want to trade minors/exotics then I will use spot FX. If I am making a longer term trade or can get away with the larger sizing then futures are the right answer.
*Note - I have edited my first post to clarify the differences
Actually, retail forex traders can take advantage of the same 60/40 benefit available to futures traders in the US. Furthermore, unlike futures traders, retail forex traders in the US have the added benefit of not having to use that 60/40 split in situations when it’s better not to do so as described in the following article.* How Currency Traders Can Reduce Their Taxes
We agree, and we’re certainly not anti-futures, since we offer futures and options through our FuturesOnline affiliate. Like you, our interest is in helping traders choose the right product for the right reasons.
In addition to the points you highlighted, another factor to consider for those thinking of using futures for longer term trades is the fact that you have to watch out for when the contracts become deliverable. You will then have to close out your positions in the nearby futures contract and open new trades in the next futures contract. By contrast, retail forex trades are automatically rolled over from one day to the next, so your positions never expire.
Good discussion!
*The tax treatment of your forex trading activities depends on your individual circumstances and may be subject to change in the future, or may differ in other jurisdictions. It is suggested that you contact a certified accountant for further information on your tax planning.