Best Futures Contracts to Trade

6 mins read
by Angel One
हिंदीతెలుగుગુજરાતી

Best futures to trade

Choosing the best futures is one of the critical aspects when it comes to day trading. Depending on the day and the value, a futures contract will have a different day trading margin requirement, which essentially means that you need to have varying amounts of money in your trading account to conduct a transaction.

In this article, we’ll see how to get an idea on the best futures to trade in.

First, let us first look at how futures are defined. These are nothing, but a financial contract which obligates buying or selling an asset at a pre-determined future date and a pre-determined price.

One needs to understand that different futures contracts come with varying levels of risks and rewards, just like other investments, whether they are stocks or bonds. When the market of a specific commodity remains volatile, it might affect the changes in the prices. Sometimes, these may have low liquidity because there could be less demand for the underlying asset.

Here are a few things one should look out for when choosing the best futures to trade.

  1. The right trading platform: Even before you go about finding the best, you need to choose the right futures trading platform. There are some key factors you need to consider before zeroing down on a trading platform. To begin with, it should enable fast and efficient trade. The fees structure should be clear and transparent, and the commissions should be reasonable. The platform should have access to different exchanges, have an easy interface, and an advanced technological platform. Plus it should have features that help you make sense of large volumes of trading data in a fast and efficient manner,  have tools that help you analyse the data and also provide the latest news. Choosing the right platform could make the difference when it comes to whether you will be making money or losing money when trading in futures.
  2. Margin requirement: There is a sum of money you have to deposit before you can buy a futures contract position for day trading or otherwise. The amount of capital you would require for day trading will vary according to the type of futures contract you trade. Feature contracts have different margin requirements for day trading. One thing to remember is that day trading margin requirements are lower than overnight margins, but for this, a trader needs to close his position before each session ends. The lower the margins, the better it is, especially if you have a small account. However, a bigger account and more significant margins give you more flexibility. So choosing the best features has a lot to do with the margin money requirements you can meet. Low margin money requirements give you more bang for the buck. Another factor that should play a key role in choosing the best futures to trade would be the amount of time you have at your disposal to do the research, be involved in active trading and also for reviewing your performance.
  3. Liquidity:Liquidity is another feature an investor needs to consider when choosing the best futures to trade. What is liquidity? To cite an example, let’s say that you have bought 50 futures contracts, but at the time of selling, you can find buyers ready to purchase 10. In such a case, you will be forced to sell the contracts at a relatively lower price. The difference between the desired rate and the lower price you end up selling your futures is known as slippage. This means that the contracts are not liquid enough. In such a case, the cost to enter and exit is higher. Several factors affect liquidity. One of these is the bid-ask spread, which is also defined by the amount by which ask price exceeds the bid price. The bid-ask spread is an indicator of liquidity, with a lesser spread indicating higher liquidity. Other factors that affect the liquidity of futures are the number of orders against each bid and the frequency at which a contract is traded in the market.  The more the orders, the higher the liquidity.

Trade volumes and open interest also decide on a market’s liquidity. Open interest refers to the total number of contracts that have not been squared off or settled by delivery.

  1. Volatility:Certain commodity futures are more volatile than others. The more volatile the market, the more it moves and more the more chances of making profits. The best futures to day trade should be contracts that are high in volatility. Some traders prefer volatility as it gives them a chance to make more profits for the same transactional costs. However, more conservative investors may look at less volatile contracts. Before choosing the best, volatility is thus an important feature that needs to be considered. This should be based on your risk appetite. The investor should measure market volatility by collecting sufficient data and then calculating standard deviation and the mean range of the market, which indicates how volatile a market is.
  2. Contract size: First, let us understand what we mean by the contract size. The contract size is the number of financial instruments underlying futures that are traded on an exchange. The contract size is related to risk exposure. Larger contract sizes mean the potential for higher returns. However, the cost of trading is higher in this case. When you are trading in futures, do remember that there are contract sizes for every type of investor. For small traders, mini futures are more suitable, but larger contract sizes are preferred for investors who want more leverage.

With so many future contracts available, it is difficult to get started. Choosing the top futures to trade takes a lot of research on the part of the investor. One has to carefully study all above factors like liquidity, volumes and margins by doing their research and analysing relevant data. An investor needs to vary all of the above factors and see how it is affecting his investments in different market conditions. Expert help is also recommended to help in this process.