Forex Spot Trades Vs. Currency Futures

By David Goodboy

Over the last several years, Forex Dealers have been springing up everywhere. Attending the New York City Trader's Expo this year, I was surprised at the number of FX dealers that were all exhibiting very similar offerings. Some competitors even used the same trading platform just white labeled to appear customized.

My thoughts were there must be tremendous profits in the FX Dealer business to support the preponderance of dealers offering truly non-differentiated offerings. My next obvious thought was, where does this profit come from? These guys generally do not charge commissions, so how do they get paid?

Dealer profiting - your Loss is their gain
They make their money in several ways, first is from the bid/ask spread which normally is at least 2 pips and sometimes as high as 5 or 7 depending on the dealer.
The second way and some say the sneaky of dealer profiting is to actually take the other side of your trade. Your losses go directly into the dealer's pocket.

How is this possible? A little known fact about trading with FX dealers is that your trade isn't actually placed in the true interbank market, but merely held on the dealer's own books. They are the counterparty, therefore your losses enrich the dealer and your gains come directly from the dealer. Conflict of interest? I'll let you decide.

Dealers are improving; however, some are moving to a non-dealing desk model and having several banks compete for your trades with the best price on the pair. You are trading with the dealer as your counterparty in an unregulated marketplace - seems pretty risky for the serious trader.

Is there an alternative for the active currency trader?
Yes. There is an excellent alternative in the form of currency futures offered by the CME. I am particularly partial to the E-mini version of the currency contracts from the CME.
The E-Mini Euro symbol E7 is the one I am most familiar with. It moves in $6.25 ticks and the advantages of trading this future over the EUR/USD pair offered by dealers are several. First and foremost is the very tight spread and low commissions offered by most brokers.

Secondly is a regulated marketplace with price transparency.
Thirdly, your broker can't play games with your trades as dealers sometimes do, as the trade is made in the actual marketplace and not held on dealers' books.
The bottom line

FX dealers offer more flexibility for the FX trader, particularly small traders. They provide access to the market for those very little capital. In fact, several even allow you to trade micro lots with just one dollar in the account! The spreads and other negatives have less of an impact if you're a longer term or swing trader.
Currency futures definitely have the advantage for short term/day trading/scalping. In the end, it really comes down to personal choice and style.
Good Luck!

Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.

The opportunities of trading the Forex hedged grid system

I have seen the hedged grid system been used successfully (and highly unsuccessfully) over the last few years. Unfortunately the failures tend to discourage traders from taking advantage of this great system. I have found that the failures are mainly due to ignorance, impatience and greed (common reasons for trading failure).

In a nutshell the grid system uses the following methodology. You start by buying and selling a currency. When the price moves a predetermined distance (grid leg) you cash in the positive leg, leave the negative leg and buy and sell again. Sooner or later the system goes positive and you would then cash in when it is positive.

This is a brief summary of the content of our free hedged grid trading course available on expert-4x.com. Please refer to this course for more details of how money is made. The attraction is that the system is reasonably mechanical, can be programmed and does not take much supervision as exclusively entry orders are used.

Money is made when the price retraces 100%, 50%, 33% at various levels. This starts looking like a strategy that supports the Fibonacci concept. The grid system is also based on the nature of the market to trade sideways 80% of the time and to trend 20% of the time.

The dangers are that what if the price does not retrace and continues to trend. The Grid system can not make money in a trending market – full stop. One has to realize that. You therefore need Strategies to minimize damage during these periods:-

Firstly I have found that the biggest mistake made by traders is that they select a very small grid leg sizes e.g. 20 to 30 pips. This is a recipe for disaster. The trick is to use big leg sizes between 150 and 300 pips. What this does is that it sometimes turns a trending phase into movement in a sideways market. I would typically use 300 pips for the GBPJPY and 150 pips for the EURUSD for instance.

Secondly there is no rule that says that the legs have to be the same size. So I change my leg sizes in trending markets to be even bigger. If I started with 150 for the 1st leg I would go to 200 for the 2nd leg and 250 for the 3rd leg etc. This makes sure that I am carrying less loss making transactions in a trend.

Thirdly – sometimes it is wise to increase the number of lots with the trend compared to the numbers against the trend in a good trend. However be aware of having the same number of sell and buy transactions. All you will have done was lock in your current status in a 100% hedge.

Fourthly – This is the biggest change and most important one that I personally have made in my grid trading strategy. Always cash in all your transactions when your system is positive and when the price reaches the end of one of your grid legs. By cashing in you are reducing the risk of carrying negative lots in a trending market. This also gives you an opportunity to re-assess the market conditions.

Fifthly:- Cash in a start again is always an option. One of my strategies is to cash in all my open positions when the 3rd leg of my grid is reached and start again. Experience has taught me that this is a short term pain that goes away very quickly and is soon forgotten.

People that have traded the grid system will immediately see how the above approaches will reduce the risks of exponential losses building up in a strongly trending market.
Mary McArthur is a Trader associated with expert-4x.com. She provides the main input into the page rated Forex Trading Blog www.forextradeoftheday.com and assists with the educational and trading alert services provided by www.forextradersupportservices.com. She is considered an expert of the hedged grid system and has co authored a free grid trading course on www.expert4x.com . She can be contacted at marymacarthur@expert4x.com.