futures

Best futures contracts available for algorithmic trading

In this article we will continue discussing futures markets and contracts that are interesting also for trading algo strategies. In the last article we focused on basics of futures trading. When building a diversified trading portfolio it makes sense to focus on various markets to diversify our risks. Still we have to remember that commodity markets are affected by various factors strictly related to the specific market as well as universal factors like money inflation that tend to drive prices of all commodities as a group higher.

Why trade commodities using futures

Let’s remind ourselves why futures markets are a good place to search for trading profit opportunities.

1.      Regulations

A great advantage of futures trading is that everyone has access to the same markets and that markets are regulated. In the US for example you can rely on the Commodity Futures Trading Commission aka CFTC. Futures trading works similarly in most developed countries and is being performed on regulated exchanges. Unlike with most forex brokers in futures market you are trading against other traders, not your broker.

2.      Data

Everyone can see the same data in futures markets for contracts traded on a selected exchange, for example CME Group exchange. That applies though only for contracts on a certain exchange. The same commodity can be traded on different futures exchanges. For example the the Crude oil contract traded in New York (CME) might have a different price from the Brent crude oil contract traded in Europe (ICE exchange).

3.      Trends

Commodity prices are well known for nice long trends and not only in inflation times. If you catch trends during commodity booms you can have very generous rate of returns on your trading portfolio. The strictly mechanical and consistent trading done by algorithmic trading strategies can definitely help here when monitoring many commodity markets simultaneously.

4.      Liquidity

Most leading commodity futures markets provide enough liquidity to be able to trade with as low costs as possible. For example the front month for Crude Oil futures traded on CME trades almost half million contracts every day. You can easily hit the bid or lift the offer with 100 or more contracts using market orders and getting no slippage at all!

5.      Margins

Futures contracts trade mostly on margin. Your broker usually requires only a small fraction of the nominal contract value. This is not the case during special events like one that happened during the COVID pandemic. We could see the crude oil price went negative!

Always check current margins for each contract traded with your broker (or an exchange).

6.      Trading hours

Not all markets are being traded 24 hours a day. Most agricultural commodities are being traded for only few hours a day which can be beneficial for traders that prefer calm sleep.

Futures markets worth to keep an eye on

Stock Indexes

This category is mainly represented by various index futures markets. Most traders tend to prefer US stock index futures or their micro-equivalents that became available recently. Using stock index futures you can easily ride the stock market boom or hedge against market turmoils.

E-mini S&P500 (ES) –this is one of the most liquid futures contract available for online trading. The contract follows the price of the S&P 500 index (500 stocks of top US companies). Each point in this market following one of the leading US indexes equals to $50. The minimum price increment corresponds to 0.25 so each tick represents the monetary value of $12.5. For its micro version E-micro S&P500 the monetary value is one tenth of the mini version.

E-mini Nasdaq 100 (NQ) – another highly liquid contract that follows price of the NASDAQ 100 index. This index represents the US big-tech stocks basket. There are stocks like Apple, Facebook, Microsoft and others. The price ticks in 0.25 price increments while each tick equals to $5. The point value is $20. The micro version is again one tenth of the mini-version.

We recommend to check other index futures contracts as there are really plenty of them. Not only for trades with smaller accounts can the micro index futures contracts be also an option.

Energies

CME energies are another good sector to distribute our risk into. Energies such as Crude oil, Natural gas or Gasoline futures provide enough liquidity and price moves to provide good trading opportunity.

Crude oil (CL) – the contract represents 1,000 barrels of the West Texas Intermediate (WTI) Crude Oil futures. This is the world’s most liquid oil contract. WTI Crude Oil futures are the most efficient way to trade the light sweet crude oil blend after a sharp rise in US crude oil production. The CL contract trades the monetary value of $10 for each tick that equals to 1 cent (0.01) price increment.

The e-mini (QM) and micro (MCL) crude contracts are also available at the exchange. You can note that e-mini crude and CL contract use not only a different nominal size but also a different tick size. That means a strategy performing well for the full-size contract (CL) does not have to necessarily work for the e-mini. Also the e-mini and micro contracts are usually not that much liquid and high slippage cost can be expected when using market orders of a large size.

Natural Gas (NG) – the natural gas contract represents value of 10,000 MMBtu. With the tick size of 0.001 the min price move for a single contract equals to $10. The natural gas is definitely worth watching not only when severe winter weather hits US.

Gasoline (RB) – the 42,000 gallons futures contract uses the minimum tick size equaled to 0.0001 ($4.20 per tick). The gasoline market can be wild often and provide good opportunities for momentum traders. Recommended is to trade only the front month due to wider spreads. In the front month you will get easily 5 ticks or more slippage when the market order is used.

You can reduce slippage and spread cost by trading gasoline calendar spreads as well.

Softs

The softs category includes commodities like Sugar (SB), Orange Juice (OJ), Cotton (CT), Cocoa (CC), Robusta Coffee (RC) and many others. Contracts for these are being traded on the ICE exchange. They also provide many European futures contracts but beware of higher data costs at brokers (even for non-pro traders).

Sugar No 1 (SB) – the Sugar No. 11 contract is the world benchmark contract for raw sugar trading. The contract prices the physical delivery of raw cane sugar, free-on-board the receiver’s vessel to a port within the country of origin of the sugar.

Currencies / FX

Traders like forex markets and you know what? You can trade currencies using futures! CME offers multiple currency futures contracts including mini and micro versions. Check the FX futures category on CME on products you might like. You can easily trade currencies such as Euro FX (6E), British Pound (6B),Japanese Yen (6J) or Australian Dollar (6A) and micro contracts are also available!

Micro EUR/USD (M6E) – for all forex traders that for some reason prefer not to trade using a classic forex or an ECN broker, CME has got an opportunity to trade the micro EUR/USD contract.  The contract size is €12,500. And we have some good news. When trading futures no swap is ever charged! Traders just pay the round turn fee that is usually no more than $1 per contract for most futures brokers.

A good thing here is that if you have a good working strategy that you trade on forex it will very likely work for the futures contract as well.

Agricultural

There are many agricultural contracts you can trade on CME. For example Corn (ZC), Kansas (KW) or Chicago Wheat (ZW), Soybean (ZS) or meat contracts such as Lean Hogs (HE), Live (LE) or Feeder Cattle (FC). All of these are very popular not only among seasonal pattern spread traders. The tick size for most agricultural commodities is $10 or $12.5.

Metals

Futures contracts for various metals are also available at CME. You can trade precious metals such as Gold (GC), Silver (SI) with the tick size $10 and $5 and also using the full or micro metal contracts (the tick size is $1 for both MGC and SIL). The Copper futures (HG) contract is also worth mentioning.

There is also another category called Interest rates which includes various US Treasury notes and bonds.

As you can see the range of selection is wide. Even if you decide to trade just one or two of those mentioned it can provide you with great trading a diversification opportunity.

tomas262

tomas262

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