Trading Futures

About a year ago, I moved my trading predominantly to futures. It has been a rich and beneficial learning experience, so I decided to share it in this post.

Let me first start by saying that the future markets are different than the stock market in many ways. The biggest advantage to me of trading futures however is the diversification. We hear many times one should own a diversified portfolio, fine. So we allocate a portion in stocks, another in bonds. We may go further into international stock/bond markets, even some commodities. But, can you trade wheat, soybean meal, lean hogs, cocoa, copper, gold, natural gas, yen, S&P 500? Because that’s exactly what I have in my portfolio at the moment. There are ETFs tracking some of these, but I think I made my point.

A major problem for a retail investor to trade futures is their size. In the future market, the unit of trading (the equivalent of a stock) is a contract. And contracts are huge. For comparison, one can trade a single share of the SPY (S&P 500 ETF) for about $200. The e-mini S&P 500 future, the ES, is 50 times the index. In other words, a single contract is worth about a $100,000! At that size, the loses amount quickly once the market starts moving against you.

On the bright side, one doesn’t need a multi-million dollar portfolio to trade a few futures. The margins are much bigger too. To control a single ES future, the overnight margin requirement is to have a bit less than $15,000 in the account. I am not recommending to trade even a single ES future on even double that amount, but you get the idea.

Another oddity of futures is that one needs to start thinking more in dollar rather than in percentage terms. It is (or more precisely, it becomes) much easier to compare strategy performance in terms of dollars, because, frankly, at a leverage one to six, even a slightly winning strategy starts looking too appealing to pass.

Because of all these peculiarities, the strategy development turned out to be substantially different to what I was used to, and you might expect that to be the topic of a few up-coming posts.

Let me end this post with two extremely well-written books, which helped me a lot on the path of algorithmic future trading:

  • ”Following the Trend”: Covers a lot, very interesting read, especially enjoyed the section with the year-by-year walkthrough for the hypothetical system. Invaluable to understand the pitfalls and obstacles even when one ends up making a lot of money!
  • ”Building Reliable Trading Systems”: It’s written by one of the most well-know strategy developers and he doesn’t disappoint.

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