Chicago Mercantile Exchange is the largest futures exchange in US

Every day trader must decide which financial instrument to trade. There are many choices including futures. forex, stocks, and options. There are also many considerations of your own, and conflicting advice from your friends. Indeed, it is a difficult choice to make.

Lets cut the chase and tell you why futures trading is the best option for a day trader.

Profit from your analysis with futures trading

Futures move in tandem with its underlying asset.

Futures and options are two derivatives used by active traders.

For options, we analyse the underlying asset but trade the option. This is a problem because while we analyse the underlying asset, our profit and loss is not directly linked to its movements.

Instead, our profit and loss depends on how option prices move. However, due to factors like time value and volatility that affect options pricing, it is possible that the option prices do not move in tandem with its underlying at times.

Very often, the underlying asset might move as you anticipated but the price of the option does not budge. At times, it might even move a little in the opposite direction. This is especially common in short trading time-frames. Your analysis is right but you are not rewarded. This is a problem for day traders who want to extract quick profits from the market.

On the other hand, futures move in tandem with its underlying asset. In fact, traders apply technical analysis tools on the futures market directly. This allows us to profit from our anticipation of price movements without the complications of derivative pricing.

Futures has no restrictions on short-selling.

There are no restrictions on shorting in the futures market.

A day traders job is to take only the best trades. regardless of whether it is a long or short trade. With the unfettered ability to take on long and short positions, a day trader can stay neutral and act according to his or her current market analysis.

The stock market is different. Although day traders can short-sell stocks, they are still limited by the shortable stocks offered by their brokers. This is because you need to first borrow a stock through your broker, before you can sell them to profit from a bearish move.

Moreover, financial regulators all over the world frown upon short-selling. Although short-selling bans do not solve fundamental problems of the stock market, regulators have used short-selling bans on many occasions as a short-term solution to prevent stock market collapses.

Free your trading capital

FINRAs Pattern Day Trading Rule does not apply.

According to FINRA, you are a Pattern Day Trader if:

• You use a margin account; and
• Day trade the same security for more than four times within five business days; and
• The day trades form more than 6% of your total trading activity for the same five-day period.

And if you are a Pattern Day Trader, you must keep up at least $25,000 in your trading account to day trade.

It is very difficult for day trader to avoid the label of Pattern Day Trader. Of course, you can trade very infrequently, or use a cash account. Both are not ideal solutions and impede the goal of a day trader.

Day traders want take the best trades, even if the best trades occur more than four times within five business days.

Day traders want to make the most out of small intraday swings and using a margin account for leverage is essential.

Those are the bad news, at least for stock and options traders. The good news is that the Pattern Day Trading Rule does not apply to futures traders.

Futures traders can have less than $25,000 in your account and still day trade to your hearts content. (Subject to your rigorous market analysis, of course.)

Day traders can make use of lower initial margins for futures trading.

To enter a futures position is to enter a contract to buy or sell. You are not really buying or selling anything, yet. So you do not have to pay.

However, you need to post an initial margin (also known as the performance bond) as a guarantee of your ability to fulfill the contract. The amount of initial margin depends on the product and market volatility.

While the futures exchange set the initial margin for overnight trading, futures brokers are free to decide on the initial margin for intraday trading. The difference is significant. For instance, the initial margin for the E-mini S&P futures (ES) traded on the Chicago Mercantile Exchange is $4,510 per contract, while many futures brokers offer day trading margins as low as $500.

For day traders, this means that you can trade one ES contract for every $500 in your futures trading account. Given the size of one ES contract is $50 x S&P 500 Index (now at around 1800), you are controlling a value of $90,000 with only $500.

A note of caution: Lower day trading margins is not a reason to take on excessive day trading risk. Your position size should still be determined by a sound model based on the expectancy of your day trading strategy and your risk capital.

However, you should certainly make use of the lower margins to manage your trading capital more efficiently.

Feel safe trading futures

There is central clearing for futures.

As futures are contracts, they are technically exposed to the risk of contracting parties failing to act according to the contract terms. This risk is known as counterparty risk.

However, futures are traded on the exchanges and the exchange clearing house is the counterparty to both sides of the contract. With daily marking-to-market and performance bonds pledged to the clearing members, the counterparty risk of futures contracts is almost zero.

On the other hand, most retail spot forex brokers are mostly market makers. This means that when you buy or sell forex, your broker sells or buys it from you. If your broker is unable to fulfill the deal, which is possible, especially for small forex brokerages that are not well-regulated, your paper profit is worth less than the paper it is written on.

Volume data for futures contract is reliable.

An advantage of having central clearing is that you can get reliable trading volume data. The volume reflects the interest of market players and is useful for technical analysis, especially volume spread analysis. You can trust that your volume analysis is meaningful.

Getting reliable volume data from your forex dealer is impossible. This is because spot forex trading is decentralized and no one dealer has all the information.

Futures Trading is the Best Option For Day Trading

To summarize, this is why futures trading is a day traders dream.