The best futures contracts for day trading

The futures markets attract a certain type of speculator, as they offer significant benefits at practically a fraction of the cost. For example, in order to trade on equity markets such as the US S&P500, an investor would need a significant sum of money.

Secondly, when trading an index where there is no leverage available, the investor must ensure that they have adequate funds to support their trading activity. Then, there is also the risk of price fills. In the stock markets and in most other markets, the price at which you want to buy and the price at which your order will be fulfilled can differ.

In some cases your order might be filled only partially. This is due to the nature of the markets, and for speculators such fills can quickly destabilise their trading.

The futures markets, although created for a specific purpose, have become a vehicle for day traders. Day traders take advantage of the benefits offered by futures markets to make a quick profit from the volatility.  

You no longer need to have a capital of $25,000 to trade on futures markets. Many day traders in futures can trade for as little as $5,000 if not less. These day traders trade the same markets as investors, but there are slight differences.

The biggest benefit that futures markets offer traders is that the contracts are already leveraged. Furthermore, futures contracts are standardised and cleared through an exchange, thus making them more trustworthy to trade. Last but not least, futures markets are very liquid and allow traders from anywhere in the world to trade the various contracts.

Types of futures contracts

There are a number of futures contracts to pick from. The most common are as follows:

  • Index futures: Index futures are basically instruments that reflect the underlying stock market index. For example, the E-mini S&P500 is a very popular index futures contract that mimics the S&P500. You also have other contracts such as the Dow futures or the Nikkei futures. All these contracts are derived from their respective stock market indexes.
    Examples of index futures include ES (E-Mini S&P500) and YM (the Dow Jones e-mini contracts).
  • Currency futures: Currency futures are derived from the spot Forex markets and here you can trade currencies such as the euro, yen, British pound, US dollars, etc. All prices for currency futures are denominated in US dollars. However, in recent times, the CME group (the exchange where futures are traded) started to introduce cross currency futures contracts as well.
    Examples of the currency futures include E6 (euro futures), B6 (British pound futures), and F6 (Swiss franc futures).
  • Financials: Financial futures contracts are made up of bonds and US treasuries. Here, the underlying instruments are 5-year treasuries and also 3-year bonds. Financial futures contracts can be used as a way to either trade the bond markets or allow speculators to hedge their exposure against the underlying bonds.
    Examples of financial futures include the ZN (10-year bond futures) and ZB (US Treasury bond futures).
  • Commodities/metals: Metals futures contracts have an underlying exposure to the commodities or metals such as oil, gold, silver, etc. Here, commodity traders can take advantage of the speculative nature of these contracts and thus trade oil or gold cheaply.
    Examples of a commodities and metals futures contract include CL (Crude Oil futures) and GC (Gold futures contracts).
  • Commodities/agricultural: Agricultural futures contracts are vast and can be subdivided into other contracts such as grains, meat, cattle, and so on. These are primarily used by farmers, importers, and exporters who deal with the specific commodity in question. The agricultural commodity contracts are also volatile and often used by day traders.
    Examples of agricultural futures contracts include ZS (Soybean futures) and ZC (Corn futures).

How to pick a futures contract to day trade

The first step when picking a futures contract is to look at the market that you want to trade. Not everyone is a master of everything; therefore it is always good to start with an area that interests you. For example, the S&P500 is a very popular index and relatively easy to trade.

If stock markets are your passion, then choosing S&P500 or the Dow Jones futures contracts are the way to go. But if you like oil or gold, then focusing on these contracts could help.

The next step is to understand the futures contract itself. Knowing the calendar months in the contracts you are trading can help you avoid entering too late or too early when volumes and volatility could significantly change.

It is also equally important to understand the contract specifications. Each futures contract is standardised differently. For example, there is a big difference between trading the standard S&P500 futures contract and the e-mini S&P500 or ES futures contracts.

An understanding of futures contracts will allow you to know the tick size and the minimum value of these ticks, which can help you in managing your money more effectively.

Deciding based on these factors

In addition to the above-mentioned points, it is also important to know if the futures contract you want to trade is liquid enough. When you trade in an illiquid futures market, you can expect to see large price gaps. While this is great if the price moves in your favour, an adverse gap in the opposite direction could lead to a big loss due to a lack of orders.

The timings when the contracts are traded are also important as it helps you to catch the trends, which are very prevalent in agricultural contracts. Seasonality is something that plays a big role in commodities markets, therefore traders should pay attention to fundamentals and not just the technical analysis of the instruments being traded.

Conclusion

In conclusion, the futures market is very liquid and offers traders different ways to gain exposure to the underlying market instrument. Day traders are particularly attracted to the futures market because it takes only a small amount of capital to start making profit.

However, a word of caution! The futures market is risky and can turn volatile very quickly. You can be at risk of losing your funds if you do not know how to trade or do not know your risk profile very well. Therefore it is always better to focus on just one contract and try to learn a lot about it before you start trading futures.

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