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Trading Spot FX vs. FX Futures with IB?

  #3 (permalink)

Seattle, Washington
Trading Experience: Intermediate
Platform: NinjaTrader, ThinkorSwim, TWS
Favorite Futures: ES, Forex, Options
Posts: 6 since Dec 2012
Thanks: 14 given, 7 received

Xyzzy View Post
Hey all,

As background, I've been trading an automated strategy through MultiCharts and IB on the equity index futures. I'm now trying to branch into forex. I'm working on a strategy that seems to backtest equally well on either the 6E future or the the EUR/USD FX spot. Assuming that I stick with IB as my broker, is there any reason to choose either the FX future versus the spot market?

Here's what I've seen so far:

1. The prices for the spot market and the future contract are nearly identical (just differing by random noise), and they trade during essentially the same hours.

2. They both have high volume. According to charts that I created using @EU# and EURUSD.FXCM from IQ Feed, the @EU# symbol tends to have somewhat higher volume. However, I'm not sure how accurate this is. (It seems that determining volume for the spot market is a bit of a "black art," since it's OTC and unregulated.)

3. It looks like my leverage would be roughly the same for either market. If I trade the 6E contract, the margin requirement is $3138 per contract (i.e., for controlling 125,000 euro). If I trade the spot market, my margin requirement is 2.5%, so a comparable trade of 125,000 Euro would require about a $4000 margin (assuming a total cost of $162,000).

4. It looks like commissions for the spot market would be somewhat higher, at least at lower volumes. The futures commission is about $2 per side per contract, including fees. A comparable purchase of 125,000 Euro on the spot would cost about $3.10 per side (assuming a total cost of $162,000 and 0.20 basis points). At higher volumes, though, the forex might be cheaper to trade.

Interactive Brokers fx commissions

(I know that the EUR/USD is typically traded in lots of 100,000, but I used 125,000 here for an apples-to-apples comparison.)

Given this, my instinct is to stick with the futures contract, particularly since I'm more comfortable with futures trading in general. However, if I've missed anything important, or if I'm way off base, please let me know!

By the way, I also noticed this thread with a similar question. It has some good information, but it veered a bit off-topic.

Many thanks in advance!

I too have been looking at the differences between Futures and Spot. I read a good book on this last summer (the book had a lean towards Futures because it is written by a Futures Broker): Carley Garner's book on trading currency in the Forex and Futures markets (Currency Trading in the Forex and Futures Markets: Carley Garner: 9780132931373: Books). It has lots of detail on the various differences.

It will always come down to personal preference but I am leaning towards the spot markets due to the risk in the Futures that comes from fixed contract sizes. I run money management where my risk is 1% of my account (for example). Because IB (and Oanda) support units as opposed to fixed contract sizes, I can execute the right position size. That might mean that on a particular trade, given my account size and the stop required, I will want to trade $63K in currency. You could do this using futures with multiple mini contracts but the commissions and liquidity are not in your favor. You could also go with a Broker like FXCM that allow micro contracts as that gets you close enough to arbitrary unit sizing - but IB has better spread than FXCM. Futures contracts require you to size in their increments and therefore, if you are running a position sizing algorithm, it will be ineffective. You will either go too small thereby negating one of the purposes of position sizing (optimal bet size) or you will over shoot and take on a larger size (more leverage/risk) which will ultimately bite you on a bad trade. That is the risk I was referring to. Being required to take a non-optimal position size and over-doing it on a bad trade.

Just my 2 cents worth given that I've been looking at the same issue. I am using IB and NT right now but I am considering setting up a small test account with Oanda or FXCM.

-Dr. G

Last edited by DoctorGM; April 8th, 2013 at 11:09 PM.
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