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CFDs vs Futures Trading

Reading time: 17 minutes

This article will provide you with a detailed comparison of CFDs vs Futures, including definitions for both of these topics, together with, the differences between CFDs and options, how to use futures trading strategies, a practical example of futures trading, advantages and disadvantages of trading with CFDs and trading with futures, as well as several visual aids, to help you understand how these instruments look, and how to trade them.

CFDs vs Futures Trading

It was in 1851 that the first futures contract was written. The product was corn and it occurred at the Chicago Board of Trade (CBOT). The plan was for the seller (who was a farmer) and the buyer (an industrial company) to commit to a future exchange of product for cash at a fixed price. Since then, futures trading has attracted more markets along with bringing even more buyers and sellers into the fold. While the futures market is predominantly the arena for commercial and institutional traders, it also gave birth to the speculator - someone who profits from picking the correct future direction of a given market.

But with the advent of technology and super fast computers, many traders have opted to trade on futures markets using CFDs (or Contracts for Difference). In this article we explain all there is to know about futures trading, CFDs, the pros and cons of each product, the markets you can trade in, and how to develop a strategy to benefit from both of these products.

What are Futures?

The futures market originated in the commodities industry. It was farmers, miners and oil producers who wanted to manage the risk of not knowing the price they would get for their product in the future. This gave birth to the futures contract. Essentially, the seller of a futures contract would agree to sell a fixed quantity of a certain commodity on a particular day in the future to whomever wanted to buy the contract. The price of this contract would depend on the demand from buyers, as well as the supply from other sellers.

In a similar way, the buyer of the futures contract would agree on a fixed price to buy the underlying commodity from the seller on the expiration date of the contract. For instance, with Admiral Markets you can trade CFDs on commodities and other similar products. Nowadays, when trading futures there are more than just commodities available (which we will explain in further detail later in this article). However, the pricing has remained in the same locations, such as the big futures exchanges in America.

A few of them include:

  • The Chicago Mercantile Exchange
  • The Chicago Board of Trade
  • The New York Mercantile Exchange

Futures exchanges can also be found across Europe and in other major financial trading hubs. The only difference now is that instead of people buying and selling contracts in the 'pit', it's all performed electronically through a broker.

What is Futures Trading?

So far we've mentioned who the futures market was designed for - businesses, farmers, miners and so on. However, because of the often extreme price movements in some of these markets, it has also given birth to speculators and different styles of futures trading. One such style is day trading futures. In this type of trading, a trader would speculate on short term price movements throughout the trading day. Most day traders are highly active, often taking multiple positions a day to seek out a profit at the end. However, it is considered very risky to start out this way, especially for beginner traders.

Another style of trading is futures spread trading. The foundation of this style is to profit from the change in the price of two different positions. For example, a futures spread trader could take two positions at the same time, on the same market, but with different dates to try and profit from the price change. Some traders may elect to use longer term strategies, but as you go on to learn about futures trading contract sizes, it really is for those with very large sums of capital.

Let's take a look at how these futures contracts are actually traded:

Trading Futures Contracts

So far, we know that a futures contract is an agreement by one party to buy, or take delivery, of a product like a commodity or a currency, at a fixed future date and price. But how are they actually traded?

Futures are traded on exchanges where all contracts are standardised. This basically means that each contract has the same specification, no matter who is buying or selling. Contracts are typically standardised in terms of quality, quantity, and settlement dates. For example, everyone trading an oil contract on the New York Mercantile Exchange knows that one contract will consist of 1,000 barrels of the West Texas Intermediate (WTI) oil at a particular quality level.

Most futures contracts come in five character codes. The first two characters identify the product, the third identifies the month, and the last two identify the year. For example, WTI oil could read CLX20. CL = Crude Oil, X = November (there is a certain code of months and letters listed on the exchange's website) and 20 = Year 2020.

Of course, there are some disadvantages to having a fixed expiry date of your position (as we highlight further down in this article). Also, you cannot change the size of the contract, which can often be quite large. In the example of oil one contract is the equivalent to 1,000 barrels of oil. You cannot trade in less. As some futures contract sizes can be quite large, some of those involved in futures spread trading and day trading futures have turned to CFD trading.

What are CFDs and CFD Trading?

A CFD is a derivative product that allows a trader to speculate on the rise and fall of a market. They were originally developed in the early 1990s in London by two investment bankers at UBS Warburg. Essentially, a CFD is a contract between two parties, the buyer and the seller. It stipulates that the seller will pay the buyer the difference between the current value of a market, and the value when the contract ends.

In this instance, the seller is usually your broker, unlike futures trading where you trade directly with an actual buyer or seller of the commodity you are trading. With a CFD, the trader pays the difference between the opening and closing price of the underlying market. Whilst CFD trading may seem similar to futures trading, there are some big differences.

Differences Between CFD and Futures Trading

Futures Trading

CFD Trading

Expiry dates (monthly, quarterly)

Generally no expiry dates

Trade via an exchange (CBOT, CME, NYMEX)

Trade via a counterparty (your broker)

No ownership of product

No ownership of product

Can trade long and short

Can trade long and short

Tradable on margin

Tradeable on margin

Less markets available than CFDs

Can trade over 3,000+ markets


The Advantages and Disadvantages of Trading Futures and CFDs

There are many advantages and disadvantages of trading futures and CFDs that will depend on the individual trader's circumstances. However, we will highlight some of the most important:

Advantages of Trading Futures vs CFDs

  • Full Price Transparency: Futures are openly traded on public exchanges like the Chicago Mercantile Exchange. As they are frequently bought and sold by institutional investors and commercial companies, the pricing reflects the underlying market very closely. With CFDs, the price is calculated from the underlying futures market and then adjusted to accommodate the fees of the broker. These could be minimal or large in liquid markets, but higher in more exotic markets that are not traded as often.
  • Cost Effective for High Level Traders: Commissions for futures contracts tend to be quite low in the larger markets. This makes it ideal for large quantity traders, due to the savings costs. However, as you will find out below, trading futures requires much more starting capital compared with CFDs.

Disadvantages of Trading Futures vs CFDs

  • Very Big Contract Sizes: When trading futures you are buying a contract to buy a certain amount of a product, or a commodity. These amounts are standardised. For example, Gold trades in a size of 100 ounces per contract, with every one point move being an equivalent of $100. This means if you bought just one contract (the lowest you can buy on the futures market) then a ten dollar move would mean that you would lose 1,000 USD. Gold is volatile and can move much more than ten dollars a day. With CFD trading you can adjust your contract size to fit in line with your own risk management.
  • Expiration Dates: Every futures contract has an end date. This means the value of the contract is eroded the closer you get to the expiration date. It also means that if you wanted to stay in the trade for longer, it may not be possible to do so. With CFDs there is no expiration date, which adds a great deal of flexibility for a trader who wants to exit their position when they want to.
  • Fewer Markets Available: Whilst there are a good range of markets available for trading futures, it is nothing in comparison to the volume of markets available to trade with CFDs.

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Which Markets Can be Traded on With Futures and CFDs?

When trading futures, the first markets available were commodity futures trading, and oil futures trading. However, nowadays people are trading currency futures, futures trading bitcoin and indices, as well as embarking on futures option trading. This may seem like quite a lot, however, all the same futures markets are available to trade on CFDs, and more.

There are some markets that are simply not listed on the futures market. For example stocks and shares are listed on the stock market, but are also tradable as a CFD. The futures market only offers some of the major currencies, whereas CFDs offer a great variety of global currencies.

Of course, the more markets you trade, the more information you need to consider, such as futures trading hours. All the futures markets available to trade have different opening and closing times (although some are the same). Some also close for an hour in the middle of the day, at different times for each market.

For example, gold futures trading hours are: Sun – Fri 5:00pm – 4:15pm CT with a 45 minute break each day beginning at 4:15pm on the CME Globex exchange. And when do bitcoin futures start trading? On the CME Globex exchange it is: 5:00 p.m. – 4:00 p.m. CT Sunday – Friday.

How to Get Started with Futures Trading Strategies

When trading futures, it is not dissimilar from trading on any other market. Of course, there is a lot more to know about the expiry dates of your trades, as well as risk management and contract sizing. However, the process of developing a strategy is the same. Here are some key things to consider when getting started with futures trading strategies:

  • What style of trading should I have? There are a variety of styles to choose from. Will you be day trading futures? Will you embark upon futures spread trading or futures option trading? Having a clear plan is essential in building a solid foundation from which to work from.
  • What markets will I trade? Will you be trading on oil futures? Or perhaps commodity futures trading? Remember, each futures contract has different contract sizes and minimum amounts that you can trade. Traders with small accounts may struggle to find suitable markets to trade when trading futures.
  • What strategy will I use? Your trading strategy helps to define your parameters for entering and exiting trades. Maybe you use trading indicators, or simple price action patterns to help you with your decisions. The key part is to try and remain consistent with your tools, so that you can start to build a solid foundation upon which you will contribute toward your future success.

In addition to finding the right style, the market and the strategy are also important factors behind finding the best futures trading platform for you. There are quite a few futures trading platforms out there, but it may be useful to use a platform that also offers you a multitude of products like CFDs, foreign exchange, indices, commodities, stocks and shares. Combining multiple products may prove to beneficial in the long run, depending on your trading outcomes.

Futures Trading Example: The US Treasury Note

As discussed above, finding the best futures trading platform for you may not be measured on things such as mobile trading, or even ultra low commissions. For some traders, having the flexibility to generate and act upon ideas in all markets may be the leading factor. For example, let's take a look at the daily chart of the US Treasury Note futures market below, which is available to trade on the Admiral Markets trading platform:

First, let us look at the 12 month chart:

US Treasury Note Chart

Source: Admiral Markets MetaTrader 4 MT4 - USTNote_Z8 - Data range: from 22 May 2017 to 10 October 2018 - Performed on 10 October 2018 at 9:07 PM BST

And now, let's zoom in to the 18 June - 8 October 2018 period:

US Treasury Note Chart

Source: Admiral Markets MetaTrader 4 MT4 - USTNote_Z8 - Data range: from 18 June 2018 to 8 October 2018 - Performed on 8 October 2018 at 9:24 PM BST

The first thing you will notice is that the name of the symbol is USTNote_Z8. This means we are viewing the US Treasury Note in 'month Z' of 2018. Looking at the Chicago Mercantile Exchange codes, the month Z is December. This means that this contract will expire in December. But when does it actually expire? A simple way to check is to right click on the futures trading instrument in the Admiral Markets MT4 Market Watch window, and select 'specification'.

The following box will pop open on the chart:

US Treasury Note - Contract Specification

Source: Admiral Markets MT4 USTNote_Z8 - performed on 8 October 2018 at 9:33 PM BST

As you may already see, the 'Last trade' date is 2018.11.30, which is 30 November 2018. So, we really are seeing the December 2018 contract for the US Treasury Note. Now let's go back to the futures trading chart of this market to see what we can learn:

US Treasury Note Chart

Source: Admiral Markets MT4 USTNote_Z8 - Data range: from 18 June 2018 to 8 October 2018 - Performed on 8 October 2018 at 9:36 PM BST

In the light blue ellipse above, you will notice that the market has stayed below the blue line on the chart which is the 20 day moving average. This indicator is useful as it can help us to identify the overall trend of the market. As the price is trading below the moving average, it highlights the market is in a down trend. Trend based traders will aim to trade with this move to the downside, and look for short positions. They may also use price action reversal patterns, or other trading indicators to help with timing their trades.

Here is an example:

US Treasury Note Chart

Source: Admiral Markets MT4 USTNote_Z8 - Data range: from 18 June 2018 to 8 October 2018 - Performed on 8 October 2018 at 9:47 PM BST

The highlighted white box within the blue ellipse is an example of a bearish pin bar reversal. Some traders use these bars to trade from, and may enter when the low of the bar is broken, with a stop loss located at the high of the bar.

In this instance, an entry price of 118.71, with a stop loss at 119.01 traded at 10 Lots would result in a loss of 300 USD. If the trader held on and closed out three days later at the end of the trading day on 3 October 2018, the profit would have been approximately 810.00 USD.

However, let's say that the trader wanted to capitalise on this move further, but did not want to add any more risk into this market. Well, the trader may have researched the negative correlation of US bonds, like the US Treasury Note with the USDJPY currency pair. As one goes up, the other goes down, but not always. Having access to other markets to diversify the risk of the trade could prove to be useful.

Combining Futures Trading and Other Markets

Let's take a look at a daily chart of the USD/JPY currency pair during the same time period as the US Treasury Note:

Let's first start with the 12 month chart:

USDJPY 12 Month Chart

Source: Admiral Markets MT4 USDJPY - Data range: from 4 May 2017 to 10 October 2018 - Performed on 10 October 2018 at 9:08 PM BST

USDJPY Chart

Source: Admiral Markets MT4 USDJPY - Data range: from 20 June 2018 to 8 October 2018 - Performed on 8 October 2018 at 9:59 PM BST

You may realise that it looks like a mirror image of the US Treasury Note. In this instance, the USDJPY is trading above its 20 day moving average, suggesting a possible up trend. Trend traders may follow the same process and look for price action reversal patterns like bullish pin bar setups, or they may use other trading indicators. In this simplified example, the best futures trading platform for the trader wanting to diversify between markets would be one that offered a multitude of markets to trade on. When it comes to CFDs vs Futures Trading, it is down to the individual's preference. However, a combination could well be the right balance for most traders.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Risk Warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.