Futures or CFDs? What to trade?

Futures are a very efficient and essential instrument in the financial markets. A society that has not got developed futures markets cannot be considered a developed society.

Futures are mainly traded in the United States of America, and there are also important markets in Europe and other developed societies. For this reason, the best futures brokers in the world are American.

So if you want to trade futures you better go to an American brokerage. European brokers are more expensive than American ones.

Although if you are a well-capitalized trader, do not do day trading and trade just a few times per year, paying 15€ o 5 per contract will not make a big difference. That difference in commissions may be important for small traders who trade more often.

For instance, if I trade 2 ES futures per week, and 100 contracts per year, it makes a significant difference if I pay 3$ instead of 15$. Above all if your account is not very big.

Advantages of futures over CFDs

  • Futures are cheaper than CFDS, whether we trade indices or commodities; with perhaps the exception of forex, where there are very good providers in the forex spot and CFDs markets. We may not pay commissions for CFDs, but when you pay a five pip spread on the CL (oil) contract, you are paying 50$ of commissions every time you open and close a trade. Whereas the futures for that contract have one pip spread plus the commissions, which is usually lower than 10$.
  • There is more transparency in the futures markets. Markets are centralized and prices are the same for every participant in the market. In CFDs, you bet with the price the house or shop sets. The CFD price will reflect approximately the futures price but never exactly. Prices could be manipulated by the CFD broker. The market, obviously, is not centralized for CFDs.
  • The CFD charts may have some discrepancies with the futures ones. So there could be some errors if we try to use technical analysis.

 

However, the futures have a disadvantage against the CFDs: for the retail trader it is not efficient to trade futures when you have a small account.

Futures margin

The majority of futures brokers offer high leverage and the possibility to open an account with as low capital as 2 or 3000 $, which is used for many traders to try to do day trading. After all, it is normal that brokers encourage doing day trading. They just want customers and commissions and do not care too much for the rest.

Fair enough.

However, one of the keys to keeping alive in this world of trading is not to do what brokers want you to do.

They want us to do day trading?

So we should not do day trading.

We should do swing or trend trading.

Trade fewer times, and trade better.

Futures contracts size problem

The problem with futures is that their contracts are quite big, so if you want to have a good money management, it is very difficult unless you have more than 50.000 or 100.000 $.

 

For instance, the ES future is one of the most famous and liquid contracts in the world. Every tick is 12.50$. One point has four ticks. Then if the price is 2000 and you want a 2% stop loss, you would lose 2.000 $. So if you have a 20.000$ account you should not swing or trend trade the ES because as soon as you have four or five losses in a row your account goes belly up. Nevertheless, if your account is 200.000$ you can handle it quite well. The other problem with money management and futures is the fact that you cannot increase contract size easily. If you trade one contract with a 1000$ stop, when you try to trade two contracts your betting size doubles. Whereas if you want to increase contract size the best way is to do it with more contracts; for example, from 10 to 11 contracts. You can do that very easily with CFD contracts, where you can trade the ES (sp500) with a contract size of 2.000 $ instead of 200.000 if the market price is 2.000 $. So it is clear that futures markets are for professional and big capitalized traders and CFDs for small retail traders.

Most brokers tell us that the way to heaven is by doing day trading. That is why we think that opening a 5.000 $ futures account is a good idea, but the truth is that it is not, believe me.

Futures markets nowadays

Futures markets have had a huge increase in competition around the world because of the increasing popularity of spot forex trading.

Before, there was not much competition for the futures markets if you wanted to trade with leverage. Nowadays hundreds of thousands of new retail traders go for the forex markets, and that makes that a lot of potential customers are lost for the futures markets.

As the futures industry is mainly an American one, the American government has made very difficult for forex brokers to operate in the US. CFDs are simply not allowed there. The rest of the world however has seen an increase in CFDs and forex trading. Without so much competition from forex there would be a lot more people trading the futures directly. Although the rest of the world does trades the futures markets anyhow since most CFD prices, and brokers use the futures prices as a reference.

In conclusion, if you are a small trader, futures are not for you. CFDs, Stocks and Forex are more efficient ways to trade the markets. And do not do day trading.

Thanks for reading and sharing.