I am new to the Forex markets and still learning... A friend of mine said he trades the spot forex. He watches the different forex pairs and makes trades using the currency futures. Is this possible? I thought the spot forex and futures currencies had different price quotes??? thanks!
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Well, it's certainly possible, if somewhat cumbersome, depending on the currency pair. The price difference -- premium or discount -- between a currency future and corresponding spot forex pair reflects the interest rate differential between the 2 currencies, accrued between now and the future's expiration date. In spot, you receive interest on the currency you are long and pay interest on the currency you are short. In futures, you don't -- the differential is built into the price quote. Take a look at the approximate closing prices (bid / ask), at 5 pm EST Friday, for some of the majors: EUR/USD 1.2040 / 42 6EU5 1.2070 / 72 (+30 pips) GBP/USD 1.7524 / 28 6BU5 1.7491 / 95 (-33 pips) So, Euro FX Sep. 05 future trades at a premium to Euro spot, while Pound Sep. 05 future trades at a discount to cable. As expected, reflecting that short-term rates are £ < $ < E. (For simplicity's sake, we're ignoring short-term deposit rate vs. lending rate.) That premium / discount will converge to 0 by the future's expiration date, 2 business days before the 3rd Wednesday in September. Those are the so-called "direct quotation" currency pairs: how many dollars per 1 unit of currency. For "inverse quotation" pairs (how many units of currency per 1 dollar), it gets more cumbersome: USD/CHF 1.2950 / 53 6SU5 0.7758 / 61 USD/JPY 112.22 / 24 6JU5 0.008965 / 67 (All CME currency futures are direct quotation, for better or for worse.) Same principle, but now the future and spot move in opposite directions -- the charts are mirror images, flipped over the horizontal (time) axis. The inverse of 0.7758 / 61 is 1.2890 / 85, so Swiss Franc future trades at an implied premium of 35-37 pips over swissy spot. Similarly, Yen future trades at an implied discount of 69-70 pips under ¥ spot. Consistent with the interest rates ¥ < $ < CHF. To complicate matters just a bit further, the premium / discount is anything but fixed, even on a given day. Sure, arbs are supposed to keep it in a fairly narrow range, typically, within 1-2 pips. But during fast markets it can and does get out of line. In a spike, I've seen it off by 10, 20 and more pips many times. I think to do what your friend is doing would require some way to convert between spot and futures, on the fly. Such as a super-imposed chart, or a real-time Excel spreadsheet, etc. Maybe you could ask him what he's rigged up.
Thanks for the answer. I think your right, from the way you have explained it, he must be doing the calculations quickly. However, from your post, it would just make life easier to follow the Futures Currency quotes and trade the futures currency OR Follow the Spot Forex quotes and trade the Spot Forex. There seems to be no reason to mix and match the two.
Yep, it would make life easier not to mix'n'match. Easier is not necessarily more profitable, though, in trading... I can think of a few plausible reasons to simultaneously watch spot and trade futures. But I don't want to put words into another trader's mouth. Maybe you could ask him why he does it that way and let us know what he says?
I know one reason he does this is to also the see the relationship between the big 6 pairs and the cross currencies. I believe he said it gives him a bit of an endge when watching the others.
It would only make sense to watch spot if he is getting "true" market quotes, the re-quoting on most spot retail dealers won't do much good. The futures are still preferred market for executions on the majors for the typical individual.
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