There are a number of considerations when deciding which contract to trade:
First, overall liquidity. If you need to trade with a very large number of contracts due to the size of your account, then you have relatively limited options, mostly the ES, treasuries, and maybe the euro. Of course this is only if you have a heck of a lot of money, which isn't the case for most people.
Assuming that the number of contracts you are trading can comfortably be handled by just about any futures instrument, then the next factors to consider are as follows:
1. Overall daily range
2. Average slippage costs (this includes commission as well as the average spread on the contract)
3. Signal-to-noise ratio, or "trendiness" of the contract
4. Speed of movement during high volatility
How you rate these factors in order of importance depends on your personal trading style. The optimal chance to make money occurs when the ratio of slippage to daily range is as low as possible.
Let's take two examples, ES and CL:
For ES, you must always pay a quarter point spread to get in at the market, plus commissions are let's say in the range of $4 per contract or so, which means that you are paying 1.3 points in spread and commissions to get in and out of this contract in a hurry. Let's say for the sake of argument that the average daily range on ES is something like 10 points (I don't know what it is exactly, but it's around there)... so that means that in percentage terms, you are paying 1.3 / (10 pts x 4 ticks per point = 40 ticks) = 3.25% of the entire daily range every time you get in and out of ES at the market.
Now, on CL, assuming we are talking about pit-traded hours from 9 AM to 2:30 PM EST, you will get an average spread of approximately 1.5 ticks (sometimes it's 1, sometimes it's 2). The commissions are probably a bit higher, let's just call it $4.50 per contract for the sake of argument. So your average cost to get in and out at the market on CL is approximately 2 ticks, including commissions. The average daily range on CL is probably around $2.00 or 200 ticks, which means that you are paying 1% of the daily range in slippage and commissions to get in and out. Even on a very narrow range day of $1.00, your slippage is no more than 2%, and on a wide range day where it runs $3-$4, you can get slippage as low as 0.5% to 0.75%. All in all, it's approximately 3 times better than ES.... but remember that this assumes that you are trading with a certain contract size or less... if you are trying to trade 50 contracts at a time on CL as a scalper, it won't be nearly as easy because you can't count on that type of liquidity being available on the first two levels of the bid/ask all the time. This means that you will incur additional slippage, which can hurt performance.
Therefore, you can see that making money on CL is generally easier than ES with a relatively small amount of contracts, because it's costing you less to get in and out of the instrument relative to your profit potential. The wider spread on ES relative to the amount that it moves generally means that you have to place your orders ahead of time as limit orders, to avoid paying that market spread all the time (at least, this is how many people trade). This limits your options, and makes it more difficult to just let the market tell you when it's time to get out.
Another factor is "trendiness" - how much a market chops around in getting from point A to point B. Generally I have found that currency contracts like 6A and 6C chop less, while lately something like gold will chop a bit more. Choppier contracts are generally harder to trade, although if you get used to them it's not an issue.
Finally "speed of movement" - how fast does a contract move when things go nuts in the market. Something like CL is just about the hardest thing to trade when things go crazy, because it moves so fast. Unless you really know what you're doing and have hotkeys and quick reflexes, you're going to find it relatively difficult to make money during those times... of course, if you're good you can also make a lot of money pretty fast, which is nice. Generally slower moving contracts are easier to trade, but require more patience which can be a problem for some people.
Overall, I like 6B, CL, GC, FDAX, and occasionally things like 6A, 6C, 6J, 6E, and ZS. I would only trade the ES on a heavily trending day where the spread wasn't as much of a factor (i.e. those days where it runs 20-25 points). I definitely wouldn't choose it as a regular trading instrument on a normal consolidation day. I also wouldn't touch something like bonds with a 10 foot pole, they are probably the worst in terms of spread-to-range ratio, and definitely do not suit my trading style. They may work for other people though, if you like to place limit orders and trade that way.
Last edited by FBJS; January 5th, 2010 at 05:27 PM.
The following 2 users say Thank You to FBJS for this post:
I think you meant 1.3 ticks, not points, though it's a little bit more
1 tick = 0.25 S&P points = $12.50 + $2.20 / side ($4.40 / RT, using Mirus commissions) = $14.70
so entry = 14.70 / 12.50 = 1.176 ticks a trade (2.352 round trip)
So the actual percentage terms = 2.352 ticks / (10pts * 4 ticks/pt) = 5.88% of the entire daily range, actually worse than what you expressed! As an ES trader, this is disappointing! I've always known ES is not very good for large trend moves, and it is very noisy and choppy, but I like it's liquidity and narrow spreads.
I've also heard good things about 6B's and CL's larger swing moves and have them on my list of markets to learn more about.
Good analysis, assuming your assumptions about market range is accurate. It's definitely something to consider which I've been thinking about lately as I'm looking for a more trend-friendly instrument to trade. That is why I posted this earlier today.
The following user says Thank You to shodson for this post:
It depends on how you are calculating things. The way I look at it, I ask "what is it going to cost me to buy at the ask and then sell at the bid right away"? If you do that, your slippage costs (loss) will be .25 points ($12.50) plus $4.40 commissions. (I used the $4 figure just for the sake of argument in case some people get volume discounts.) So the total loss per contract using Mirus commissions as you stated, according to the way I calculated it, is $17 or so.
But either way you calculate it, it's about 3 times worse than CL. The so-called "narrow" spread on the ES isn't actually narrow at all, because you have to compare the spread to the daily range to get a true idea of what it's really like... the smaller the daily range, the more the spread comes into play.
If you are looking for an index instrument to trade, try the DAX. It has extremely low commissions in comparison to the ES for the dollar movement that you get per contract.
Hmm, I would think one would need to understand the fundamentals of the German economy, news cycle, and other economic indicators to *REALLY* successfully trade the DAX, nein? Otherwise, you might as well just trade it purely technically/automatically.
P.S. Just checked, the ATR(20) on a daily chart of ES ranged between 12 and 18 pts in December, FYI.
Well, since I trade purely technically, that's not really a problem for me... makes things really simple. :-)
Not surprising that it's a bit higher than the figure of 10 pts which I guessed at... but then again I was only referring to the trade that occurs during the US session from around 8 AM EST. If you take the entire 24 hour range, it would obviously be a bit higher. I would suspect that the ATR on the US session is not more than about 12 points or so these days...
1 word - just brilliant, your one post is more informative than the whole book about trading of some authors.
May be I also liked that because it mainly in line with my thoughts/conclusions, however they are not at such level as yours, but I also figured out that better to understand what each market can give and based on that build realistic profit expectations.
Regarding favorite contracts, don't know about CL and FDAX (don't traded), but 6B really "hot stuff" especially from very EU morning is to enter correctly it can give daily profit comparable with other contracts weekly profit GC also nice, don't know you are keeping in mind different world's gold pits opens/closes and London fixing times (if remember correctly)
The questions about ZS (assume you are trading that without any indicators), if to compare it to ZC, for me quite not clear following :
- ZS has one of the most "conservative" pits, it gives good moves, but bid/ask quantity in DOM against ZS is tiny. However daily volume traded (pit hours) quite the same at ZC/ZS.
I'm trying to study that markets more and that's why paying attention to any details.