I'm sure this is an easy question. I've traded plenty of fx for my day job, but I'm wondering what the best way to do it as a retail investor would be. Do you use: 1. futures 2. forwards (are there brokers where i can do forwards?) 3. spot 4. other (etf?) I know I can easily do spot but IB is gonna give me LIBOR (or some variant) minus 25bps or more (on some foreign stuff) and it can change. If I do futures at least I know I'm collateralizing in USD where I know exactly what the rate is. Or maybe there is a better broker than IB for fx? I'd also like to be smart about transaction costs...not sure for a retail investor which method is cheapest. Thanks in advance for any thoughts.
bobbyzimmy, Welcome to ET. Your came to the right place. Many traders are attracted to the higher volume & tighter spread pairs... Some guys have figured out how to destroy THEIR pair and just like the way it moves and might be an individual thing. I am looking forward to the comments that your thread will bring and why... Michael B.
Assuming you are ready to start trading Fx, I would recommend the fx futures where the spreads are pretty much 1 pip on majors and commissions can be controlled with a good broker like IB. No worry about carry (unless you want to) and the futures are very liquid during main hours. Leverage is enough to make it profitable but not so much to hang yourself. You can start with 1-2 contracts until you get a good feel for it.
I have to agree, FX futures are the way to go in retail. Though, just like in Spot, during news releases, spreads can go wide (5-12p) for the first few seconds. If you're position trading, it generally makes sense to trade FX futures. Providing of course that you hold is not so long that the "decay" (futures and spot get closer to parity the closer you get to expiration) isn't eating into your profits. Also, it makes sense if you have to pay the differential in spot instead of being paid the differential. There aren't as many "games' played in the futures as there potentially might be played in the spot market. And the spot market isn't all that much more liquid that the futures. Especially the major pairs like EUR/USD or USD/JPY. Forget about the 1.x trillion dollar a day quote so often heard about FX. Only about 2-5%, if that, is available to retail. Another thing to be on the look out for is CME/Reuters FX marketspace in early 2007. Google that for details. Happy trading.
Future is the way to go. You get exact quotation, prompt execution and reporting. Some people prefer the pairs because of the free commission. But I don't believe there is anything free in this World. If the broker scalps you 1 pip, that's more than what you'd pay at IB.
Could you explain this to me? Isn't the interest rate differential reflected in the futures curve? A short futures position in the Yen collateralized in USD should have a "roll yield" equal to the USD/JPY interest rate differential, no?
Yes that's right. I was making a comparison of trading futures v. spot. In spot, if you were long or short a currency pair in which the differential was such that at the close of each day, you're account would be debited, it pays to trade the futures. Not every broker or dealer accounts for the exact differential. Some account the actual and charge you accordingly. Some tack on a small amount depending on the value of your position. Or if you were holding a pair in which you would be credited the diffential, it may pay to hold the spot. The future's "differential" only shrinks. This is the "theta" of the future. My terms are unorthodox as some of it is from option trading. But theta or time decay applies to futures also. I've only seen the "premuim" of Futures v. spot decay or at most stand still for a day or maybe two. Even so, the point of the future's/spot differential is to take into account the interest rates. Emini S&P v. the cash has the same thing going on. Takes into account Eurodollar+T bill, dividends, and days to expiration. Well, with currencies, the premium(differential) is based on the interest rate of the respctive currencies and days to expiration. You're never actually being paid the differential and are never actually paying it either. There's no material impact on your account when position trading currency futures as there could be (depending on broker or dealer) with Spot trading.
Oanda pay interest on your balance by the second, daily. It's the best bank account i've ever seen ... they take their cut on interest speads though ie. if the rates are close then chances are you will be paying interest on a position regardless of being long or short. I've found all retail spot firms have their "thing" though.. at least they don't reject my orders or fail to fill limits/stops
Thanks to those who replied. Looks like futures are the way to go. I'd still be glad to hear from anyone who disagrees.
Could not disagree more. As is quite common on ET and online, nearly everyone did a great job of advocating confidently why what works best for them will work for you as well. That often means that one side is presented, out of two. Your question can't be answered meaningfully or intelligently, without considering all the relevant factors. Among them: your trading capital... financial situation... money management... currency pairs... trading hours... knowledge / skill / experience levels... full-time v. part-time... strategy type(s)... time frame... citizenship... location... taxes... OPM down the road. Incidentally, what is your day job, in which you've "traded plenty of fx"?