Day trading offers various strategies across different financial instruments, with futures presenting unique advantages for traders. This guide explores the key advantages and considerations of futures trading, based on my experiences with Chicago Mercantile Exchange futures.
Key Advantages of Futures Trading
Shorting is Dead Simple
There is no additional cost or margin requirements for short positions nor do you need to borrow shares.
Built-in Leverage
Futures contracts offer significant leverage, typically higher than stock on margin, forex, or crypto accounts in the US. This allows a trader to make more money with smaller price movements. It also requires discipline to avoid substantial losses.
Transparent Cost Structure
Fixed commissions provide predictable trading expenses. Traders pay a set fee for each contract they trade.
Tax Advantages
Futures offer beneficial tax treatment in the US. Often described as the 60/40 rule. 60% of your profits are taxed as long term gains, which is a lower tax rate. The other 40% is taxed at your regular income tax rate.
No Pattern Day Trader (PDT) restrictions
Scalability
Futures contracts allow for easy scaling up of position sizes. If you can learn to profit from single contract, you can easily scale that to 2 or more contracts or a larger contract, often called a mini.
Diversity
Diverse trading instruments: commodities, currencies, market indexes
Superior Historical Data
Unlike stock trading, futures provide more accessible and accurate historical price data. Most brokers offer historical trade data at no additional cost, sometimes decades worth of data.
- Platforms like Sierra Chart provide price data back to a contract’s inception
- Minimal data inaccuracies compared to stock market historical data
- Easy integration with trading platforms
High Liquidity
- High liquidity during US trading hours
- Minimal slippage
- Extended trading hours (23.75 hours, 5 days a week)
Regulatory Environment
- Strictly regulated by the Commodity Futures Trading Commission
- More transparent and potentially safer than cryptocurrency or offshore markets
- Established exchanges with long-standing market presence
- Customer funds must be kept separate from operating funds
Potential Drawbacks to Consider
Limited Instrument Selection
- Fewer trading instruments compared to stock markets
- Some contracts have low trading volumes
- Requires adaptability to different market conditions
Risk and Complexity
- Steeper learning curve compared to stock trading
- No direct company ownership
- Uninsured customer funds, i.e. no customer protection for trading firm bankruptcies, however, there has never been customer losses due to this.
- High failure rate (90-97% of day traders are not consistently profitable)