I’ve heard a lot and have been discussed a lot about Futures contract and
Spot Forex. A lot of people try to argue that futures contracts are much “better”
than Spot Forex. The term “better” here could be interpreted in a way that it’s
easier and more transparent to trade with. In this article, I’ll try to break
through the argument.
People said that futures contracts are traded on a centralized exchange but
likewise spot forex is not being traded on a centralized exchange. People
talk about the “shaving” and “shady” activities made by brokers since there is no
centralized exchange and also regulated exchange. People talk about how broker
profit from event such as news to widen spread or even to catch stoploss. Those
who talk to me use such argument to talk down spot forex not to be traded with
and there’re little way to profit unless you are a broker.
It’s correct that spot forex is decentralized market. From what I’ve seen,
pricing is also a little bit different from broker to broker; and out there,
there’re a lot of shady brokers with no real information who take advantage of
trader to benefit themselves when they shading price and widen spreads or even
take out stoploss when price isn’t reached there yet.
But the thing here to talk about is illiquidity and widening of spreads happened
and currently happening a lot in futures contrack as well. First, we need to
understand why spread is widening. Spread widening happened when there’s illiquidity
in the market where there’re little sellers and buyers. That’s why we see
spread in spot forex often higher during Asian market.
Forex futures has better spreads and more consistent pricing from what I
see, therefore if you are a scalper or a short-term trader, forex futures could
be your choice since a few pips could make such a difference. Most of my friend
are arbitrage and scalpers in forex futures market and they are doing well since
pricing is so consistent.
But the fact is that scalpers or super fast trading are not where the big
money at. They are just a small swing that is a plafrom a big swing that is concurrently
happening. I wonder why they are looking
for 5 pips instead of 500 pips without much of that headache.
Scalpers may be trying to catch 5 ticks on Euro Futures Contract but I’m
here to catch 50 pips on EUR/USD spot market. And for me, 0.5 pip of spread
difference doesn’t really matter because I’m there for 50 pips, not 5 pips. As
for 50 pips move, you’ll have more room for liquidity to play out rather than 5
pips move. For 5 pips move, a sudden swing could wipe you out. I’ll happy to let
the arbitrageurs and quant funds try to grab that tenth of a pip or half a pip
There’re theory about forex brokers do stophunting. I believe that they don’t
do do that since they don’t have the required capital to do that. People who
are doing stop-hunting are real traders, big traders or our competitor, they
have to catch retail traders stops to benefit themselves and to send out a
telegram to other big traders that they are actually stop-hunting and ready to
move in another direction.
Remember the time when George Soros broke the
Bank of England, he didn’t use futures contracts. He used the spot forex
market. George Soros sold a few billions
worth of pounds, profiting from the UK government's reluctance to either raise
its interest rates and then converted them into Deutsche Marks. At that
time there are also difference of pricing from broker to broker. But do
you really think that he would care about it. He’s in there for the long-hunt
and made a fortune and a few dollars difference won’t affect such a fortune. A
little off spread cents wouldn’t have any significance either
Therefore I believe a few pip difference difference in pricing doesn’t really
affect anyone performance since the moves are all the same.
I believe during the Soros time, in 1992, the spot forex markets are just as
inefficient as today, with much more liquidity to boost. Therefore for those of
you think futures contracts are “better” choice, please think it over.