Something to think about…
We like stock trading… we really do and have done it for over 2 decades but if you really want to maximize your trading dollar… the futures and forex market is the way to go when it comes to daytrading and swing trading.
Between the lower margin requirements, the (real) diversification and the bang for the buck that you get due to the favorable leverage that the futures and forex markets provide… it’s pretty much a no-brainer that it is the better market to be trading if you’re a daytrader or a short-term/swing trader.
You’re able to control a much larger amount of a position with futures and forex than you could with a stock… even if you’re getting 4x daytrade margin for that stock trade… it’s not even close. That leverage generally means that you can earn more per “tick” (using less of your money) with the futures or forex trade and get a much higher ROI than you would with a stock. Now, with that being said… you could also lose more as well… so there is that and trading in the futures or forex market isn’t for everyone but if it’s suitable for you… perhaps take a look at it and give it a go.
$500 (depending on your futures broker) is all that is often needed to daytrade a S&P 500 e-mini… and with how much that contract can move within a day and the value per tick… it would take you tens of thousands of dollars more to get the same type of profit potential and “action” with stocks. Even if you have to pay the “full margin” on the e-mini, which can and does change from time to time… you still come out way ahead.
Now some folks may bring up Stock options… well, futures have options as well and with the stock options market, you’re generally going to have less volume, wider bid/ask spreads, it’s not tick for tick with the underlying and quite frankly… not the overall “bang for the buck” that you get in the futures and forex market, which is still a better play. Not to mention that the FX market is a 24 hour marketplace and most of the major futures markets are close to 24 hours.
For those who are new to futures (or forex) trading (and in layman’s terms), margin is the amount that you need in your trading account to trade a futures or a FX (forex) contract. The amount of margin changes from contract to contract (and also changes from time to time due to market conditions). So for example, the margin for Crude Oil futures is different from Gold futures which is different amount from Soybeans futures, etc. etc.
To further clarify futures margin… lets say that the daytrade margin for the S&P 500 e-mini is currently at $500 per contract… and you had $5K in your account, you could trade up to 10 contracts with that $5K (10 x $500). Now, I wouldn’t recommend trading that size with just $5K but you could do it if you wanted to.
Some futures brokers (not all) offer “daytrade margin” which is a lower amount needed per futures contract for intraday trading than what the “full margin” would be if you held that contract overnight (or longer).
The different margin requirements depending on the market / pair is similar in the forex market as well. For example, the USD/JPY is different than EUR/USD.
What the margin is for each forex pair or futures contract is given to you by your broker… and most trading platforms will show you what it is for that day.
(real) Diversification Advantages
The futures contracts allow for what I would call a “real” diversification environment for daytraders and swing traders.
Most people who daytrade or trade stocks for the short-term (ie. swing trade), generally go for the high volume well known stocks… and on any given day, those stocks tend to move with the overall market. If a particular stock isn’t joining the “crowd”, you probably shouldn’t hit it because something’s going on with it and the risk rises exponentially. Long story short, most of the stocks that you would probably be looking at trading are going in the same direction.
Given that most stocks are moving in the same direction on any given day… what happens if it’s a choppy day… or the market looks like it’s topping (or bottoming) out for the day… or the overall stock trading session is acting strangely? Do you trade anyways and force trades? Do you stay out and sit on your hands? Or lets say it’s trending well, which stock are you going to pick? Do you pick several and run with it? What happens if a stock market reversal occurs and you’re long 3 stocks… now you could be wrong 3 times over.
With futures, you can get real diversification. Yeah, some of the markets from time to time do affect each other… some are even correlated (positive or negative) in a strong way like Crude Oil is with Gas Futures or how from time to time the US Dollar Index can be with Gold or the 10 year T-Note… but many aren’t all that correlated… at least not to the point that you can’t trade it in fear of any perceived (or temporary) correlation. And if you cover/trade enough markets, you can almost always find a market in a trend and moving.
So say for example… for that day the S&P 500 is chopped up and not really tradable… there are a host of other markets that could be giving great signals and very tradable… Crude Oil could be moving or Soybeans could be rocketing higher… natural gas falling like a rock, etc. etc.
The Forex market also offers diversification… as long as you are trading unrelated forex pairs. For example, if you’re trading the USD/JPY and the EUR/USD at the same time, they both are linked to the USD so any news affecting the US Dollar could be problematic. One way to avoid that is to simply not be in a trade with a bunch of linked Forex pairs at the same time. ie. USD/JPY and AUD/NZD probably wouldn’t be all that correlated and should be OK, but being in USD/JPY and EUR/USD at the same time raises the risk level for you.
If you’re new to Forex pair trading… basically you’re trading a currency pair so for example, USD/JPY is the US Dollar and the Japanese Yen pair. The AUD / NZD is the Australian Dollar and the New Zealand Dollar pair. Each country has their own 3 letter symbol and there are numerous combinations. We follow the most popular 24 currency pairs.
The Bottom Line
Like we mentioned at the top… we like stock trading and it has its place in your overall trading business but for those of you looking to maximize your profits, have more options when it comes to finding the best trades, only trading when the situation is the most ideal and getting the best bang for the buck… swing trading futures and forex is the best way to go.