The 28 Reasons I Choose to Trade Futures
I love trading futures.
They’re the right choice for me – they fit my personality, my skill set, my financial situation, and my goals. Choosing what to trade is a personal choice. Me, personally, I choose futures. Futures may or may not be a good fit for you.
I’m a US citizen, and do intra-day directional trading of futures contracts traded on the Chicago Mercantile Exchange (CME.) The list below is crafted based on that perspective.
Why I choose Futures:
- They’re highly leveraged.
- The famous 60/40 tax treatment here in the US. Even if you’re doing intra-day trading, the profits are taxed 60% as long term capital gains, and 40% short-term.
- There is plenty of profit opportunity throughout every day. Today, the ES (SP500 e-mini) ranged about 30 points, and the average 15 minute bar ranged about 6.5 points. If you capture the range of just one 15 minute bar on a trade, the profit is $325 per contract. Other futures markets offer more potential.
- There’s plenty of liquidity during normal trading hours for most futures contracts.
- It’s not difficult to find a stellar futures broker. Some brokers will allow you to trade futures, options, and equities all from the same account.
- For reporting US taxes, there is no need to exhaustively match every entry with every exit, so the paperwork is much much easier.
- The capital requirements to trade futures intra-day is low with most all brokers, and almost comically low for some.
- Commissions are very reasonable. Unless you’re “micro-scalping,” commissions aren’t, in my opinion, a cost worth worrying about.
- Execution is very simple, and familiar to anyone who has traded stocks before. All the same basic order types are available & the screens “look the same” as though you’re trading a stock.
- Other than some downtime over weekends, holidays, and daily systems maintenance, many futures markets are often trade-able nearly 24 hrs. If you make some sort of mistake during normal trading hours & find yourself accidentally holding a position in the after hours, it’s generally possible to exit even a large position.
- The larger markets are less able to be manipulated than, say, a single low-float stock. Consider the ES contract – it’s being traded by vast hordes of people and institutions, all with their own unique motivations, holding periods, trading systems, etc. Constant arbitraging adds further liquidity. All the diverse interest and active trading keeps things, if you will, “fair.”
- Shorting is always possible. You never have to call you broker to ask if they can borrow inventory to short.
- Generally, most futures contracts are settled in cash, so if you accidentally hold a contract into expiration, you needn’t worry about a barge full of soy beans being delivered to your house. (I’m actually kinda curious if there are any verifiable stories of things like this happening, in the days of old.)
- I personally trade futures in US retirement accounts, and have been advised many times that this is permissible. Check with your tax person.
- The spreads are usually just a tick during regular trading hours, for most all the popular futures contracts.
- At least for the contracts I trade, there is a single market – that is, no mysterious dark pools of liquidity, or multiple markets trading the same security. This generally eliminates confusion with overlapping books, and the confusion from prints being reported late. Price discovery is simple, instantaneous, and transparent.
- Data fees, if your broker charges them as a separate fee, are completely reasonable.
- For me, I’m first and foremost an Equity Index trader, but I’m broadening out. There are several different types of futures contracts, including also Energy, Agricultural, Metals, Interest Rates, and Currencies.
- For me, my brain is only so big, and I don’t have the capacity or the inclination to learn the deep deep nuances of how many, many markets or many tickers move. In my opinion, for me, it’s more reasonable to think I’m fairly expert at attentively trading a hand-chosen 3 or 4 or 5 futures contracts, than to be expert in, say, constantly scanning a basket of 300 stocks, looking for trade setups.
- Nine levels of bid & ask size are by default available, so for folks used to watching Level 2 screens, you’ve got it.
- The volume is large enough to do meaningful volume analysis in a trading system. This would be problematic for, say options, or prone to errored analysis of instruments traded through dark pools and/or with late reporting.
- Most traders, hopefully, will never have to think about this, but, if there is some sudden economic calamity, futures contracts have, as I understand it, no counter-party risk (relative to some other markets and the more complex and arcane derivatives products.) The exchange acts as your counter-party, not the actual person on the other side of the trade (contrast this with spot Forex, for example.)
- The playing field is level & fair. This is a really complex and somewhat subjective statement, and it’d take hours to debate the nuances of what it means, fully. But, to me, I’m very comforted by the feeling of being treated exactly the same as the institutions trading hundreds and hundreds of contracts, even when I’m trading only a handful. In fact, being the “little guy” in this market, I believe, allows me to extract profits the big guys can’t access.
- May 6th, 2010. Yep, May 6th, 2010, the flash crash. As I understand it, the CME SP500 ES emini traded without a single issue the whole day. Meanwhile that day, 160 ETFs momentarily had essentially zero value. And 27% of fund companies had securities trades nullified & broken. I have a personal belief that we’ll see more flash-crash-like days ahead.
- Advantages relative to ETFs: Futures have no annual maintenance fee, more liquidity, trade more 24/7, have more favorable tax treatment for intra-day traders, and have more leverage.
- Advantages relative to Options: Futures have much more liquidity, move more in line with the “underlying,” have smaller spreads, have smaller transaction costs, and no time decay.
- Advantages relative to stocks: No worries about pattern day trade rules for small accounts, no need to pay interest on margin (futures are inherently very leveraged,) generally more leverage, and generally more profit opportunity.
- Advantages relative to FX: No worries about how & where your broker is regulated & hence whether your funds are segregated & recoverable, and more transparent price discovery.
I hope this information helps.
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