Best Futures For Day Trading

Earlier, I explained why day traders should trade futures. Traders who bought the idea are wondering which market offers the best futures for day trading.

Let’s do some work and find out the answer.

Learn: Trading Commodities and Financial Futures: A Step-by-Step Guide to Mastering the Markets

High Liquidity For Low Slippage

Liquidity refers to the ease with which we can buy and sell the futures without affecting its price.

In illiquid markets, your transactions are likely to have a price impact. It means that when you sell your futures contracts, you are pushing the price down. The result is that you will sell some or all of your contracts at a lower price. Slippage refer to the difference between your desired price and the lower price you sold at.

For day traders, every tick counts. So we must avoid slippage by choosing to trade in futures markets that are liquid. The best way to assess a futures market’s liquidity is to look at its trade volume and open interest.

Hence, in our quest to find the best futures for day trading, we have picked the top 10 futures contracts by trading volume listed on the exchanges under the CME Group.

The top 10 products by trading volume, according to the CME Group’s leading products report for Q4 2013, are in the list below.

1. Eurodollar (GE)
2. E-mini S&P 500 (ES)
3. 10-Year Treasury Note (ZN)
4. 5-Year Treasury Note (ZF)
5. Crude Oil WTI (CL)
6. Natural Gas (NG)
7. U.S. Treasury Bond (ZB)
8. E-mini Nasdaq 100 (NQ)
9. Corn (ZC)
10. Soybeans (ZS)

High Volatility For Maximum Profit Potential

Regardless of our trading strategy, the market must move for day traders to make a profit. (An exception is a short volatility options strategy which is rare in day trading.) The more the market moves, the higher our profit potential. The measure of the amount of market movement is known as volatility.

There are two ways to measure volatility.

Standard Deviation

Standard deviation is a statistical measure of dispersion from the average. Its most popular use in technical analysis is in the Bollinger Bands indicator in which we displace the bands by a multiple of the standard deviation.

To calculate the standard deviation:

1. Define a set of data points (for e.g. the close of each price bar)
2. Work out the squared of each data point
3. Add the squared figures together to get a total sum
4. Square root the total sum

Average Range

A simpler way of measuring volatility is by averaging the bar range. It is a simple and direct method.

Bar High – Bar Low = Bar Range

Calculate the average bar range within your data set. The higher the average range, the better it is for day trading.

(Wilder’s Average True Range is also a common measure of volatility. However, it compensates for price gaps, which are not prominent in day trading time-frames. Hence, we are sticking with it simpler cousin.)

Volatility Ranking

In our ranking, we used the simpler method of calculating the average bar range. We calculated the average hourly range of the 10 futures contracts and multiplied them by their point value. This formula gives us the dollar value of the average hourly range.

The ranking below is in descending order of volatility.

1. NG
2. CL
3. ZS
4. ES
5. ZB
6. NQ
7. ZN
8. ZC
9. ZF
10. GE

Market Trends For Top Trading Performance

If you scalp really small profits, you can skip this section.

But if you trade with the trend, markets that trend more will improve your trading performance. Hence, we should find markets that trend more often.

How do we check the degree of trendiness in a market? We measure the candle body as a percentage of the entire candlestick. This calculation gives a figure that reflects the trendiness of a candlestick.

A marubozu will score 100% and a doji will score 0%.

Using an average of this trendiness measure, we are able to rank the futures in descending order of trendiness.

1. NQ
2. ES
3. NG
4. ZB
5. ZF
6. ZS
7. ZN
8. CL
9. ZC
10. GE

Low Day Trading Margin For More Bang

Day trading margin is the sum of money you need to post as a deposit before you can open a futures contract position for day trading. Day trading margins are lower than overnight margins, giving day traders more bang for the buck. However, it applies only if you close the position before the end of each session.

Your broker decides on the day trading margin. In fact, some futures brokers do not offer day trading margins and need you to post the full overnight margin regardless of your holding period.

The lower the margins, the less trading capital you need to keep in your trading account. Day traders love low margins.

We ranked the 10 futures contracts according to the day trading margins my broker offers. This list starts with the futures contract that requires the lowest day trading margin.

1. ZF
2. GE
3. ES
4. NG
5. ZB
6. NQ
7. ZN
8. CL
9. ZC
10. ZS

While your broker will offer different day trading margins, it is unlikely that ranking differs significantly.

Finding The Best Futures For Day Trading

We joined the above factors into a composite measure to see which market offers the best futures for day trading.

Day Trading Suitability Index = (Trading Volume x Volatility x Trendiness) / Day Trading Margin

The higher the index, the more suitable it is for day trading.

Ranking of Futures Market for Day Trading

1. ES
2. NG
3. ZN
4. CL
5. ZF
6. ZB
7. NQ
8. GE
9. ZS
10. ZC

According to our index, E-mini S&P 500, Natural Gas, and 10-Year Treasury Note are the top three contracts for day trading.

However, this measure is extremely simple. It is not entirely indicative of which market is the best for your day trading. Consider the following in choosing the best futures for day trading.

More Considerations For Choosing the Right Futures Contract

Consider other futures exchanges. We constrained our study to the exchanges under the CME Group. In other exchanges, there are several futures contracts that are popular among day traders. Some examples are and Russell 2000 Index Mini Futures (TF) from ICE, and Dax Futures (FDAX) from Eurex.

Consider your time constraints. Are you available to trade the market when it is active? If not, you should consider trading futures that are active in a different time zone. Futures on the Hong Kong’s HSI and Korea’s KOSPI are great alternatives.

Consider your trading strategy. Back-test your trading strategy on the different futures contracts and see how you fare. Stick to markets that work well for your trading methods.

Consider your trading costs. Futures trading costs include a variety of fees including commission and the market data feed. Different futures markets entail different costs. Check the trading costs with your futures broker and make sure that they are not prohibitive for your trading style.

Do your own research. Do not take this study at face value. Using the same factors of liquidity, volatility, trendiness, and margins, compile your own data and research. Vary the time-frame, time period, markets, and component weights to arrive at your own conclusion.

There are dozens of futures products out there. It was difficult to start.

But now, you have a logical framework for finding the best futures for day trading.