What Are The Best Futures Markets To Day Trade In 2020?

What Are The Best Futures Markets To Day Trade In 2020?

 

The following article on The Best Futures Markets To Day Trade In 2020 is the opinion of Optimus Futures

Best Futures Markets to Trade

As a trader, you know that not every strategy will suit your style or match your goals. While at the same time, you also know that not every futures market will match your trading strategy.

For instance, if your strategy needs high intraday volatility, then 30-Year Treasury bonds might not work as well as, say, the S&P 500. If you are a position trader who prefers a highly-liquid instrument with a tendency to trend smoothly, then grains might be preferable to, say, cocoa or lumber.

It all depends on the qualities or characteristics you find preferable in a given futures contract. So, in other words, the “best market” to trade depends on what you consider makes a given market tradable in the first place. And that all depends on your futures trading strategy.

Characteristics to Consider When Choosing a ‘Tradable’ Market

What makes a market “tradable”? As we said above, it all depends on the market characteristics that a trader is looking for. You are probably trying to match your personal trading requirements with the external features of a given market.

In other words, you are trying to match a) your trading strategy, b) capital resources, and c) risk tolerance with any of the following five market characteristics: margins, liquidity (volume), volatility (volume), contract size, and trading hours.

Let’s talk about each one and why their importance may vary according to different types of trading needs and expectations.

Margins: High margins can be prohibitive to traders whose trading accounts lean toward the smaller side. The biggest danger in trading a contract with high margins is falling under the required margin, sometimes resulting in a margin call but often resulting in auto-liquidation and a fee (per contract). Of course, the flip side to low margins is that you are taking larger risks with smaller amounts of capital. So be sure you have ample risk capital that’s appropriate to whatever margin level your contract requires.

Liquidity: If you’re unable to get in and out of a market quickly, then you run the risk of being stuck in a position (or not being able to get into a position) while the market moves against your preferred price level. But the idea of getting in or out “quickly” really depends on how fast a time frame you’re working with. For a day trader, that time frame can be seconds-long. For a swing trader, it can mean minutes to hours. For a position trader, it can mean days. Liquidity depends on your time requirement, among other things.

Another thing to consider is that illiquid markets are more susceptible to price manipulation by large traders. If you’re one of them, then perhaps an illiquid market might match what you’re trying to do (if not, then you might want to stay away).

Volatility: Most “investors” hate volatility. That’s why they diversify their portfolios to reduce volatility. Most short-term traders, on the other hand, rely on volatility for their market success. Some contracts are more volatile on an intraday basis than others. Knowing a contract’s volatility profile is key to finding the right market to trade.

Contract Size: Many short-term traders don’t have deep pockets. This is particularly the case for traders who are just starting out. This can pose a serious limitation on one’s trading style. For example, most traders could neither afford the margins nor potential drawdowns to hold an EMini contract overnight for a swing trade. But there are contracts that offer standard, mini, and micro exposures, reducing the dollar value per contract, and widening the range of possible trading approaches for customers with smaller levels of capital. Contract size matters depending on your trading strategy. And the smaller the contract, the wider the range of trading strategies available to you.

Trading Hours: A futures contract is most active when the largest number of buyers and sellers are engaging the market. Since intraday traders rely on price movement to seek profit, trading hours matter a lot. With that said, it makes sense for you to choose a commodity that works within your own personal trading hours. For instance, a trader in Australia or even India might find it hard to day-trade the ES on a daily basis due to the time zone. Likewise, it may be difficult for a US trader to trade various Asian or European markets during their most active hours.

So, what are the “best” futures markets to trade in 2020? There are many “bests” and we’ll suggest a few based on the market characteristics you need to match your trading strategy.

Best Futures Markets Based on Market Characteristics

Margins

The lowest margins are almost always those for day trading. And when it comes to day trading, the best futures markets or futures contracts to trade are as follows:

For E-Micro Contracts (margins listed per contract):

  • Micro E-Mini Russell 2000 (M2K) – $25
  • Micro E-Mini S&P 500 (MES) – $40
  • Micro E-Mini Dow (MYM) – $50
  • Micro E-Mini Nasdaq 100 (NQ) – $50
  • All E-Micro FX contracts – $50
For E-Mini Contracts:
  • E-Mini Russell 2000 (TY and RTY) – $250
  • E-Mini S&P 500 (ES) – $400
  • E-Mini Dow (YM) – $500
  • E-Mini Nasdaq 100 (NQ) – $500

Big Caveat: Note that many contracts with competitive margins are not listed. This is because not all of them may be suitable for day trading due to their lower ranges of liquidity. Some of the micro currency contracts listed above may vary in volume and liquidity, meaning that not all of them may be suitable for day trading. This list is focused solely on margin levels. So, be sure to check each contract’s volume profile to see if it might be suitable (or not) to your trading strategy.

Liquidity

Liquidity is a crucial factor when it comes to trading. You want to be able to get in and out of a given futures contract once your contract reaches an opportune price level. Let’s suppose your trading preferences are based on liquidity, what are the most liquid contracts to trade?

Here is a list of the top 10 most liquid futures contracts (according to sources CME Group and TradingSim). Note that just because they are liquid doesn’t necessarily mean they will fit into your trading strategy nor might they satisfy other criteria such as trading hours, exchange access, or familiarity with fundamentals.

top 10 most liquid futures contracts

Image source: CME Group via TradingSim

  1. E-mini S&P 500 (ES)
  2. 10-Year Treasury Notes (ZN)
  3. Crude Oil (CL)
  4. 5-Year Treasury Notes (ZF)
  5. Gold (GC)
  6. EuroFX (6E)
  7. 30-Year Treasury Bonds (ZB)
  8. Japanese Yen (6J)
  9. 2-Year Treasury Notes (ZT)
  10. Eurodollars (GE)

Looking at this list, many day traders would feel skeptical about trading any of the US Treasury instruments or Eurodollars. Again, your instrument of choice shouldn’t be based solely on market liquidity. You have to know your preferred futures market well enough to have the confidence to trade it. With that said, let’s move on to another important set of characteristics.

Volatility

When it comes to volatility, day traders are primarily seeking intraday volatility, the kind that’s generated by a high volume of contracts traded in a given day. Swing traders and positions traders may have different volatility preferences depending on their time frame. They are seeking contracts that will move over the short or long term, but not necessarily within a given day.

When it comes to collecting definitive data on intraday volatility, the CME Group occasionally publishes such data, but it’s few and far between. However, their Leading Products Q1 2019 study appears to hold steady, and all you have to do is check the CME Group website to confirm a contract’s daily volume.

Again, this is not so much about “liquidity” (although it’s related) as much as it’s about the kind of volatility you might expect based on a contract’s trading volume and liquidity. And four of the most volatile markets potentially suitable for day trading are as follows:

I – Eurodollars (GE) – 2,897,861 average daily volume (ADM)

Eurodollars (GE)

Image source: CME Group

Take a look at this volume. According to the 2019 CME study, the average daily volume (ADM) is a whopping 2,897,861. The kinds of price movements you may find on an intraday basis might be favorable for those looking for lots of small short-term swings.

II – 10-Year Treasury Notes (ZN) – 1,768,523 average daily volume

futures contracts 10-Year Treasury Notes (ZN)

Image source: CME Group

ZN is second on the list leading trading volume. Although many day traders might not be as familiar with the 10-year Notes as with index futures, the volume alone might be sufficient enough to make traders reconsider.

III – E-Mini S&P 500 (ES) – 1,608,022 average daily volume

Best futures to trade E-Mini S&P 500 (ES)

Image source: CME Group

Now we’re in more familiar territory. As the S&P 500 is one of the most comprehensive proxies for US companies and the US economy as a whole, it should come as no surprise as to why it’s one of the most traded index futures in the world.

IV – Crude Oil (CL) – 1,188,323 average daily volume

Crude Oil (CL)

Image source: CME Group

Last on the list of high-volume contracts is crude oil. As crude oil is the fuel that runs the global economy (literally and figuratively), it’s subject not only to supply and demand fluctuations but also highly sensitive to political risks especially in the Middle East.

Contract Size

The ability to scale down in contract size can be significant for traders with smaller accounts. It allows smaller traders to do two things:

  • Test out strategies with reduced risk; and
  • Trade longer-term positions with larger stop-loss positions.

Until April 2019, these possibilities were virtually non-existent across the four US indexes that day traders frequently traded: the S&P 500, Dow Jones Industrial Average, Nasdaq Composite, and the Russell 2000.

And although the volume might not match their larger counterparts, each index has both a micro and emini contract size for traders to select:

  • S&P 500 – E-Micro (MES) and E-Mini (ES)
  • Dow Jones Industrial Average – E-Micro (MYM) and E-Mini (YM)
  • Nasdaq 100 – E-Micro (MNQ) and E-Mini (NQ)
  • Russell 2000 – E-Micro (M2K) and E-Mini (TF and RTF)

Currencies and Gold also have e-micro and e-mini contract sizes, and some of them may be suitable for day trading, but that also depends on your particular strategy. For instance, if you’re trying to scalp a few ticks worth, then the ES may be much more suitable than, say, the emicro gold (MGC).

Flexibility in contract size can offer traders with a much wider range of strategic possibilities, but that’s also predicated on how wisely you use it.

Trading Hours

Last but not least, we come to trading hours. What is the “best” futures contract to trade with regard to trading hours? It really depends on your location.

It can be hard enough for a person on the West Coast (USA) to wake up at 5:00 am PST to catch economic releases (such as the Jobs Report) scheduled for an EST release of 8:30 am. But what if that trader happens to be living in Australia, where 8:30 am in the East Coast USA can be anywhere from 11:00 pm to 3:00 am?

Our common sense advice here is that trading hours, as criteria for trading, should supplement other criteria or characteristics when choosing a preferable futures contract to trade. Again, this is common sense, and we have no doubt that you’ll choose a contract that works best within your own personal trading hours.

The Best Futures Markets to Trade in 2020

Hopefully, we gave you plenty of suggestions to consider. Remember that your market of choice can count big time when it comes to your success as a trader. But ultimately, what counts more is how you choose your preferred futures market–meaning how you align a given market to your own personal trading strategy, time frame, capital resources, trading goals, and risk tolerance.

We wish you trading success in 2020!

Please be advised that trading futures and options involves substantial risk of loss and is not suitable for all investors.  Past performance is not necessarily indicative of future results.  This matter is intended as a solicitation to trade.

Notable Replies

  1. very interesting artcile thanks:+1:

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