Thinking about the implications of trading other assets…
You’ve mentioned several times that the order flow trading principles apply to other markets as well, and that you also trade stocks and other assets.
This has raised the question:
Forex vs. currency futures
Maybe the question could be forex vs. futures (in general, not just currency futures, so e.g. commodity futures) but since most of your examples are about forex, and most of the lessons in the Mastery Course revolve around forex, now let me ask what do you think about this particular decision:
Currency futures vs. forex trading
I think this could be a choice and not another asset to add to your trading palette.
Commodity futures could be an alternative (instead of forex) for some traders and an addition for others who want to trade it besides forex.
Both could be a reasonable decision, since if you add commodity futures besides forex, your opportunity set grow.
But if you choose to trade commodity futures instead of forex, that could also be a legitimate decision because gauging sentiment for a single commodity (like e.g. corn) probably would be a lot more easier than for a currency pair (i.e. two currencies) which are sensitive to a host of economic factors and politics, country and region risks etc. For a single commodity the number of factors is far less, I assume.
But this could be a topic in itself, so get back to my main question.
As opposed to commodity futures, I think there is no point trading currency futures besides forex since they move hand in hand.
So one has to choose between the two.
How would you choose?
These could be reasons why trade currency futures instead of forex:
- safety of funds
- time and sales to assess real volume
- some say it is easier to trade but I don’t know how they mean and if it is really easier or not
Similarly, there are arguments why trade forex and not currency futures:
- if you don’t have enough funds to trade safely futures contracts (without opening too big positions, since the minimal trade size is bigger)
- lower costs of trading (although I’m not sure that the costs of trading currency futures contracts would be so much higher)
So how could one choose wisely between trading forex and currency futures?
Does this decision come down to account balance, i.e. if it is above 100.000 or 0.5M or 1 million USD for the safety of funds suggest that the only good choice would be trading futures?
Or are there other valid viewpoints to the decision?
I try to do my currency and futures market analysis first during the day. Then, depending on how my day schedule looks like and depending on how much the macro and tactical trading in currencies and futures is taking up my time, I can potentially have 1-4 hours to dedicate toward individual stock analysis (the long/short equity portion of the day). I don’t like to stay the same. I keep trying out new things, new strategies, trading different markets, finding ways to do things better and faster, explain things to myself and other people in a clearer and simpler way.
In some ways my analysis of other markets can potentially help me understand what is going on around the world and in the US economy and help my macro analysis of currencies. As a simple example, my following of the agricultural markets like Corn, Soybeans and energy markets like Crude Oil, led me to believe that inflation would probably not be going lower, so that the ECB probably would not take action. In other cases during the early part of the year, I interpreted some information flow from certain individual stocks that signaled that the global economy was probably growing and that the equity bull market would continue.
So sometimes my research into different futures markets and individual companies can help me in forming a macro view for the currency market. It can give me an added edge.
To give some background info to your question about Currency futures, vs Spot forex, a lot of the currency futures trading occurs on the CME and main instruments are:
There are other currencies listed on the CME, but some of them do not have a lot of liquidity.
There may also be other currency futures on foreign exchanges, but I cannot follow every single instrument all over the world, so I will only comment on the U.S. CME exchange currency futures contracts.
As you point out, the currency futures move hand in hand with the spot forex: (Except for JPY which trades inverse of USD/JPY and CAD trades inverse of USD/CAD)
The EUR trades exactly like the EUR/USD
GBP like the GBP/USD
JPY trades the inverse of USD/JPY
CHF trades the inverse of USD/CHF
AUD trades like AUD/USD
NZD trades like NZD/USD
CAD trades inverse of USD/CAD
They trade hand in hand, because there are arbitrageurs that try to arbitrage between the currency futures market and the spot forex market. Most probably algorithms and high frequency trading keeps the pricing in line with each other.
The big disadvantage with currency futures is that you cannot trade the different currency pairs. If you wanted to trade GBP/JPY or EUR/CHF or EUR/AUD, etc you cannot do that with currency futures (for the reason above)
Another (small) disadvantage is that the currency futures only trade in 1 pip increments. You don’t get the advantage of half a pip or 1/10 of a pip spreads. The spread is either 1 pip, or 2 pips, or 3 pips, etc. If you trade spot forex, sometimes you can get a spread of 1.5 pips, or 0.7 pips or 0.3 pips, etc, depending on the broker you use.
And as you say, there is a position sizing difference. Depending on which broker you use for the spot forex market, you may be able to position size more effectively by not being forced into trading in sizes of 100,000 etc,. You may be able to do in sizes of 10k or even more precise position sizing.
As for safety of funds, I am not sure if there is a difference. I have not gone through a broker blowup, so I am not sure how the resolution process works. ( I am not sure what happened with all the futures traders with MF Global or PFG Best)
I would say it comes down to your position sizing. If you have a small account balance, where trading 100k position sizes is too much leverage for you in a single trade, then you trade spot forex. If you have a large balance and do not mind trading in 100k increments, then you can choose currency futures or spot forex.
The argument about costs and ease of trading I do not view as important. Commissions have come down so much over the past 35 years that they are both probably very low in commissions.
In some cases, depending on the broker you can have access to currency futures and spot forex from the same account.
The argument about the volume and time and sales. That is an interesting one. I have been doing a lot of additional research into volume analysis lately to try to hone my timing even better. You do not necessarily have to trade currency futures to get their volume. You can watch the currency futures chart and volume and Time and Sales, and if you see a signal, place the trade in the spot forex market if you desire to.
I would say the most important question that it comes down to is: position sizing. You do not want to force a trade with too much leverage because the minimum trade size is 100k , instead of 10k increments, etc.
After figuring out the position size, I would spend most of my time on the analysis portion and figuring out when there is trade opportunity, etc.