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future or forward
Posted: Wed Oct 17, 2007 4:22 am
I have nearly no experience in forex trading, but I am trying to see if it is possible to apply to it what works on other products (EOD trading).
The first thing that I don t understand is why so many people here in Europe use forex forwards rather than the cme futures. What is the reason for it? What are the pros and cons of cme futures vs forwards? As newbie, my first reflex would be to use the cme futures.
Posted: Wed Oct 17, 2007 6:41 am
Alex, maybe one answer might be that the futures contracts are too big for some accounts. Maybe some people wish to trade CHF vs USD with a minimum position size less than USD 125,000 (for the fullsize CME contract). Another answer might be that people in Europe don't like the USD denominated futures contracts; they would rather play (EUR vs GBP) directly, instead of (EUR vs USD) or (GBP vs USD). The futures contracts on non-USD denominated currency "cross rates" are very thinly traded. The mini-contracts are relatively thinly traded too.
Posted: Thu Oct 18, 2007 1:18 am
thanks for your answer.
So if the size is not a problem and you are happy with USD denominated futures, there is no reason not to trade the cme futures instead of forwards, or? Seems to me that a backtest is much easier with futures as long as we can have the prices with csi for example. What I understood is that for forwards you have to take the spot FX and adjust for the difference of rates between the 2 currencies. I think that TradingBlox does this on a daily basis. So for forwards you need 3 things (spot + 2 rates) instead of only the price for the future. Or is there any provider of FX forward index (where the forward is rolled every months or 3 months)?
Another question: from a cost perspective is there a difference between trading a liquid cme future and trading a forward?
Posted: Thu Oct 18, 2007 5:02 am
Retail investors don't have easy access to the FX forwards market. But they can trade the FX spot market at several retail forex shops. Open positions are automatically rolled forward on a daily basis (the positive or negative carry is taken into account). This is exactly the same as trading FX forwards.
There are however a whole series of practical differences between trading CME forex futures and trading the spot (or forward) FX market. Both have their advantages and disadvantages.
Just to mention a few differences:
- futures brokers are regulated, forex shops are unregulated
- futures contract sizes are fixed (and quite large), some forex shops allow for trading of arbitrary and very small size
- a commission has to be paid for trading futures, spot forex trading is spread based
- there is greater liquidity in more exotic currency pairs in the spot than in the futures market
- backtesting of forex futures is easy (CSI data), high-quality spot forex data are more difficult to find and are expensive
Posted: Wed Apr 02, 2008 6:47 am
Very much depends on what pairs/crosses you want to trade. Only major pairs are liquid on CME.
I haven't traded on any of the retail platforms, but I understand their roll costs are not transparent, and are potentially high. So that may be worth considering when selecting a platform.