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Do futures trades open at zero profit?
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Do futures trades open at zero profit?

  #1 (permalink)
Trading Apprentice
nashville + TN/USA
 
Futures Experience: Beginner
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Do futures trades open at zero profit?

I'm new to futures and on a demo account. Normally I trade spot Forex. In Forex when you open a trade, you are immediately at a loss of a point(pip) or two due to the spread. But when I first open a futures trade, the profit is zero. Then I can immediately close the trade without any gain or loss (except the commission of course).

Is that how it works in a live account as well???? That just seems amazingly good to me coming from the spot Forex world where you start all trades at a disadvantage of a loss, while it seems in futures, the trade starts at zero. Is that true?
Hopefully that makes sense.

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  #3 (permalink)
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charlotte nc
 
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Hi sundown858,

For retail traders that are not using high speed algos to execute their orders you will most certainly start every trade down 1 tick in virtually every case. Though there are exceptions, here are the specifics.

1. Market Orders: By definition you are giving up the spread so technically no matter what you will always start your trade down at least 1 tick... Now there will be cases where the market suddenly moves to your favor so fast you may not notice your starting position, but technically you will always start down.

2. Limit Orders (Toxic Fills): Without specifically tuning your algorythm to optimize your queue position, you will almost always only get toxic fills. This is where you get filled only as a function of the price trading through your price level against you by 1 tick. I would put this at around 80% to 90% of all trades for retail traders, though technically there will be a small snapshot in time for a millisecond where you are filled on the best bid / best ask and are flat.... The truth is, you will almost always be in the back of the queue, so your fill will come right before the price level breaks or it won't come at all.

3. Limit Orders: (Non Toxic Fills): For the side (bid or ask) that wins the price level fight and does not break, it will fill a certain percentage of it's queue before the opposite side completely breaks. This is commonly very low. On average I will say < 20% of the queue from the winning side ever gets filled. And to have any shot at being in the top 20% of the queue, you will have to post early, cancel often and monitor your queue position with a tracking algo. Retail / Chart traders don't typically have this tool set so they will do far worse than algo's that are all fighting to get to the top 20% for example.

So you should always factor in a 1 tick loss on every entry for all your backtesting.


Hope this helps.

Ian




sundown858 View Post
I'm new to futures and on a demo account. Normally I trade spot Forex. In Forex when you open a trade, you are immediately at a loss of a point(pip) or two due to the spread. But when I first open a futures trade, the profit is zero. Then I can immediately close the trade without any gain or loss (except the commission of course).

Is that how it works in a live account as well???? That just seems amazingly good to me coming from the spot Forex world where you start all trades at a disadvantage of a loss, while it seems in futures, the trade starts at zero. Is that true?
Hopefully that makes sense.


In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
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  #4 (permalink)
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Thanks Ian! But when you say “down a tick”, is tick the same as a point? For example I’m trading EuroFx and the price has 5 places past the decimal. So I think of a point as a move in that last decimal place. But a tick is a trade or point of time right?

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  #5 (permalink)
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matthew28's Avatar
 
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@sundown858
For futures a Tick is the smallest price increment that a contract can move. For spot forex you call it a Pip. A Tick or a Pip are the same thing, the smallest price move an instrument can trade in they just have different names. (My knowledge of forex is when most instruments were to four decimal places not five so I don't know if that has changed anything.

A Point means something different if the term is used properly. If the ES emini moves from 2800.00 to 2801.00 it has increased in value by one point (1$), but it moves in $0.25 intervals so there are four ticks to a point.
Spot forex dealers make their money through the spread and each individual dealer sets their own price. Futures are traded through an exchange so all dealers show the exact same price and none of them can individually manipulate it. For futures you pay a cost for every contract traded, comprising an exchange fee that goes to the exchange, such as the CME; and a commission to your broker. A typical total cost per contract for the ES might be $1.85 per side (for the entry, then the exit) or $3.70 a round turn.

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In the ES DOM example above (in ticks of 0.25), if you just hit a market order to buy you will enter at 2745.50, if you immediately hit out your fill will sell at 2745.25 and you will lose a tick or $12.50 per contract, plus the $3.70 so your account will be down $16.20 per contract. But with futures, unlike spot forex you can easily try to trade on the favourable side of the spread. (The picture shows a thin order book with not many orders waiting to buy or sell as I took the picture off a video of a news trade, the ES normally has more orders waiting). So if wanting to buy instead of using a market order to enter at 2745.50 you could click on the blue number at 2745.25 and enter a limit order to try and get filled at that price as there is only one other contract there waiting to buy. With the picture as it is, for your limit order to fill you would just need two contracts to be aggressively sold down with market orders to fill you and you would have bought at a tick better price and got in on the favourable side of the spread.

So the orders you can see waiting on the DOM, left side below the market to buy and right side above the market to sell are 'Passive' limit orders as you are prepared to risk not getting filled but want a good price, but using the button to enter straight away is entering aggressively with market orders as you want to get filled straight away.

More detail than you asked for but I hope that makes sense.

Trading, ideally structured, is a vehicle for expanding consciousness, not damaging it. - Brett Steenbarger
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