A lot of traders I talk to seem surprised when I tell them I don’t trade futures contracts.
When I explain why, I can tell there are some a-ha moments in their responses, so I thought I’d share the reasons and see what you think.
It’s not that I don’t think I can find an edge in futures contracts (I spent time researching a few years ago and found an edge or two).
And I get that there’s a lot of liquidity and leverage in the major contracts – all things being equal is a good thing.
But, when you trade seriously you need to have a path to the kind of confidence that allows you to trade with significant size.
I could see that path in futures, but I could also see lots more paths to confidence in lots more edges trading stocks. Here’s why.
With Futures, Every Trader Is Looking at the Same Chart
Maybe they’re looking at different timeframes, but everyone is basically looking at the same chart. Which is very easy to do. Anyone with an internet connection can look at the same chart (for free!) that every other trader is looking at.
With equities, there are at least 2,000 tradeable stocks each day. Scanning all those charts in real-time is a far more technically challenging problem to solve.
So by trading equities, you instantly reduce your trading competition to a much lower number.
It’s Trivial to Backtest A Single Chart
Think of the number of tools out there that can “backtest” a single instrument. It’s hard to find a tool that doesn’t backtest because it’s a relatively simple problem to solve.
My daughter created a backtester in a couple of days! That’s not the hard part, though. The hard part is applying it to the entire market.
So, again, your ability to backtest across the entire market will reduce your trading competition still more.
More Opportunities – A LOT More
When you apply a trading strategy to futures contracts, what’s the most number of signals you can generate in a day? Take a simple strategy like an opening range breakout.
With a futures contract, there is by definition at most one occurrence of an opening range breakout per day. Some days there will be zero. Of course, not all of them are going to have an edge.
So you’re going to have to go back a long time to gather enough signals to construct a real trading edge.
Now think about how many opening range breakouts there are in the stock market every single day. It’s a ton.
There’s plenty of edge there if you know how to find it. (For reference, one trader I’m coaching on his backtesting process created a strategy with 3+ trades a day with serious trading edge.)
You might find 3 trades a month with that type of strategy in futures.
It’s not that there’s no edge to find in futures, there’s just more edge in equities and it’s easier to find with the right process.
So with equities, there is:
- Less trading competition
- More opportunities
- More trading edge that’s easier to find
Oh, and less curve fitting to worry about.
