Advantages of Futures over Stocks

Different instruments offer their own advantages and disadvantages. When it comes to day trading, the advantages of futures is overwhelming. While I can’t say it will be a good fit for you, here is why I trade futures instead of stocks. I trade manually and, sometimes, algorithmically. This list is geared towards those endeavors.

Accurate historical data at reasonable cost

For stock trading, finding a data provider and downloading reams of historical stock prices can be pricey and tedious. Historical stock prices are also prone to data inaccuracies which require some fixing and must accounted for in code (when automating trades or for backtesting).

With futures, most brokers provide a fair amount of historical data for free and this can be used by most trading platforms for free. I’ve used AMP Futures, as a broker, but their data is limited. NinjaTrader is better and the best I’ve found is Sierra Chart, which has futures prices back to their inception, as least for index futures on the Chicago Mercantile Exchange. There may be others that offer similar amounts of historical data.

Ability to short

Futures can be shorted for no additional cost and no additional margin. It’s just as easy as going long.

Leveraged

Futures are leveraged. This can result is larger returns without the need to borrow money and paying interest. Of course, this requires more discipline and good trade management, otherwise you can wipe out your account in a single trade.

Low, fixed commissions, instead of a percentage of the stock price

Buying and selling a futures contract is always the same price (per instrument), regardless of how much money you make. This allows breakeven stops to be set easier, without have to do a calculation and can maximize profits on a big gain.

While I think the commissions are low, they can be more expensive than smaller stock trades. Also, the actual commissions a broker will charge can be difficult to determine as there are actually 4 components to the overall commission. Exchange fee, NFA assessment, clearing fee, broker commission and sometimes a transaction fee. Most brokers will provide their all-in fees and that’s what you’ll want to look at.

Some stock brokers offer free stock or forex trading, but generally speaking, you’ll get less desirable fills since they make profit off the spread.

Easy to scale up

You can easily buy more contracts to increase your earnings (or losses!).

Many futures contracts also have a small contract (micro) and a big contract (mini). For example, the NQ contract is worth $20 per point gained. If you want to trade with less money you can trade it’s micro equivalent, MNQ. This is worth $2 per point and requires less money in your account to trade. You can start with the micro and then move up to the full size one once you are proficient, increasing profits by 10x.

Liquidity

Many index futures markets offer high liquidity during typical US trading hours. There are more opportunities to trade than with most individual stocks. There is also less slippage, often none.

23.75/4 Trading

Most futures trade 5 days a week, 23.75 hours a day. While this does offer more opportunity to trade, often the volume drops substantially and trading during these times may require more patience. Sometimes, volume will increase during typical market hours in Europe and Asia, but not near as much during the US market hours.

Diversity

While there aren’t as many futures to trade as stocks, futures do offer a diverse set of offerings. You can trade commodities, such as oil or gold, or numerous index futures based on the S&P 500, Russell 2000, etc. You can also trade on foreign futures markets, although that adds complexity and cost.

No PDT rule

Futures are settled almost immediately. This means you can continue to trade regardless of how many trades you’ve already performed, unlike the US stock markets, which require at least $25k in your brokerage account and around a three day settlement period.

Highly regulated market

In the US, the brokers and exchanges are strictly regulated by the Commodity Futures Trading Commission. Compared to less or unregulated exchanges, like those for crypto, CFDs or foreign forex brokers, there should be less fraud, less manipulation and less chance of a broker running away with your money.

Remember, futures brokers are not as safe as a brokerage account or bank, in that your funds aren’t insured, but there are still rules futures brokers must follow, such as segregating customers money from working capital, etc. There have been some high profile cases of customers losing their funds, such as with MF Global and Peregrine, although MF Global’s customers eventually were paid back.

There was some effort to create an insurance system for commodities brokers, but the industry has fought against it.

You are not investing in a company

This can be both an advantage and disadvantage. Buying stock means you become a part owner in the underlying company. If that company releases bad news, you risk taking a big loss. This is not true of futures, and while they are subject to swings from financial news, there is no underlying company. Index futures are based on stock indexes like the S&P 500 and are thus based on a diverse set of stocks. Commodity futures, for example, gold, less so, sometimes much less so.

Well established exchanges

Futures were started to stabilize markets and prices for commodities, such as pork, eggs, etc. The Chicago Mercantile Exchange was formed over 125 years ago for this purpose. Futures are not new, however, index futures, based on the S&P 500 and other indexes, instead of commodities, were started in 1982.

Disadvantages

There are also some disadvantages to trading futures.

Fewer instruments

There are fewer instruments, compared to the stock market. Some futures are offered by different exchanges and it can be tricky to trade on some of these. Some brokers may not support them or the fees may be higher.

Some stock traders screen for certain stocks every day or so and then trade the stocks that match their criteria. This allows the trader to focus on a expected movement and specialize in that. I’ve heard of some people doing this with futures, but the pool is much smaller. Futures traders tend to have to be able to handle different price movement, choppy, ranging, trending, etc, depending on the day or hour. Of course, if the movement isn’t suited to your style of trading, you don’t have to trade.

Protection of customer funds

As mentioned earlier, customer funds in a futures broker are not insured, but there are still strict rules on handling customer funds.

You’ll lose money

This isn’t unique to just futures traders, but most day traders. About 90-97% will lose money. It is extraordinarily hard to make money and harder to be beat the return of the S&P 500.

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