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Currency Futures vs Spot

Let’s take a look at how currency futures trading differs from trading in the spot fx market, and in particular at some of the myths. There are advantages and disadvantages to both, so let’s compare one with the other and highlight some of the main issues and differences.

I’m sure you believe like many other people that the spot fx market is the only one that trades 24 hours a day. Sadly this is wrong, and any site that tells you so, is factually incorrect, as the currency futures market also trades 24 hours a day ( as well as the currency options market). As Michael Cain would say ; “Not a lot of people know that!” The reason is very simple – it is not in the interest of the spot brokers to tell you!! Both markets are closed from late Friday afternoon until Sunday evening. The largest currency futures exchange is the Chicago Mercantile Exchange where the bulk of currency futures are traded. The floor trading takes place during normal exchange hours, but Globex, which is the electronic platform, is open from 17.00 pm until 16.00 pm the following day, Monday to Friday, with the system closed every day for an hour between 4 pm and 5 pm. In other words currency futures can be traded virtually 24/7, just like the spot market!

I’ve already mentioned this, but for novice traders the place to start is in the spot market. Better still I would suggest starting in fixed odds trading, as this offers an introduction to currency trading, with a limited and known risk before you enter the trade. A typical futures contract will have a trade size of 100,000 which is the same as a standard lot size in the spot market ( or 10 x mini lots ), whilst the smallest e-mini such as the Euro, will have a trade size of 62,500 – roughly half, but still not approaching the mini lot sizes of the spot markets ( well not yet anyway). So for new traders, please do not start with futures (or even e-mini futures). The fx brokers would have you believe that you pay no commission, but of course you do –  it’s just hidden in a slightly wider spread! An ECN deep discount broker such as Interactive Brokers currently charges $1.20 per futures contract or $2.40 (plus exchange fees) for the round trip, which starts to make the 2-3 pip spreads look expensive, rather then free! For mini lot trades over longer timeframes this is less of an issue, but for regular lot sizes traded frequently, the trading costs can soon mount up. As a general rule the spreads in the futures market will be tighter than in the spot market. This is due mainly to increased competition in the currency futures, and whilst the spreads do vary, as in the spot market, typically they tend to average around 1 pip or just below. One of the constant complaints of spot traders is the manipulation of spreads, particularly just before and after significant news announcements.

Now let’s look at the interest aspect of the two, and this is where it becomes a little more complicated when we compare the two, as the currency futures contract rolls the interest into the contract, whereas the broker includes a small profit in the interest he charges on a daily basis for the rollover. If we look at the currency futures contract first, if we were to buy a contract with 40 days left to expiry the contract price might be 45 pips lower than the spot market price. If we kept the contract until expiry, the two prices would be identical. The interest has initially been ‘built in’ to the contract and decreases in a linear amount day by day until expiry. On balance the futures contract provides a better proposition when compared against various broker interest charges over the same period. I hope the above has highlighted some of the key issues for you to consider when comparing the two instruments. Now I want to discuss one of the most problematical for trading currency, and that’s the whole issue of volume ( or lack of it) which is where currency futures trading can start to help a little.