Comparing CFDs with futures for Scalping and Day Trading

27 9 2014 - 1 comment

I have been a fan of scalping and day trading index futures since 2004, I have traded tens of thousands of lots each year on the CAC 40 index futures (FCE) passing through US e mini futures like the Dow Jones 30 (YM ), Nasdaq 100 (NQ) and S & P 500 (ES) futures.

However, since 2011, I gradually transitioned to scalping and day trading CFDs on the Dax 30 and Dow Jones 30; I have finally and completely stopped trading futures. I find CFDs immensely more efficient for scalpers and intensive day traders because CFDs virtually eliminate all the flaws of futures for scalping and day trading… In one sentence, CFDs have done away with futures.

I suggest you review the details of the strengths and weaknesses of futures and CFDs for scalping and day trading and let me share my experience with you. Many ideas received will be distorted and so much the better, since a trader who does not progress is condemned.


Trading futures, a goal in the early 2000s

Becoming a futures trader was my life’s dream as a young trader. In 2004 at the age of 30, I thought I could finally reach my dream after 8 years of trading. I had managed to win € 25,000, the amount needed at the time to open a futures account and day trade futures. In fact, in the early 2000s, the most liquid derivative, the cheapest with the best image was the future that outplayed by far its competitors; Warrants, Turbos and other Options. Futures Trading was like attaining a kind of aristocratic level in trading; it was only discussed on stock forums, amongst futures traders and others … Futures traders were confronted with traders from large institutions, they saw lines of several million Euros being displayed in a few seconds … in short trading futures made me feel like I was playing in the big league, at the top of the trading pyramid. This impression lasted till 2011 when I discovered CFDs by chance.


Why did I start trading CFDs in 2011 ?

In early August 2011, the United States of America lost their Triple -A credit rating and there was a stock market panic. At the time, I was trading mainly the CAC 40 FCE future on European markets involved in scalping and it was not possible to work with this instrument. Supply and demand gaps were from 2 to 3 points almost the entire day and institutional investors had fled. The order book was desperately empty. I still remember wanting to liquidate 5 FCE lots between noon and 1:00 pm, being the best deal. There were only 5 lots on the line and you had to wait for more than 6 minutes before a single lot could pass. A horrible ordeal for a scalper! Then the market dropped sharply, leaving me with 4 lots and a nice profit that could turn into a big loss. I had to face the facts, it had become impossible to scalp the CAC 40 FCE. I had in the past few years noticed that there were fewer people on the market, and that gaps were becoming increasingly recurrent both on the FCE and the Dow 30 (YM) futures, but I clung to what I knew best, scalping futures.

A day trader friend then talked to me about CFDs and said some CFD brokers offered a 1 point spread on the CAC 40 when I had double or even triple on futures at certain times of the day, thereby making it impossible to scalp this index or at least difficult to draw recurring profits from it. This was not convincing, because CFDs had a bad press at the time because the product had just been launched in France and it had slashed prices, dividing for example by 10 the margins of French stock brokers. These brokers defended themselves traditionally; like Orange when Free slashed Internet prices by circulating information on the poor quality of CFDs brokers … In short, a little intoxicated, I cautiously opened an account telling myself that I would temporarily scalp CFDs until the order books filled up again with futures. And it was a revelation after a few weeks and a few months … Everything that had reduced my earnings on futures had disappeared. By trading in the same way, my earnings soared … to the point where I currently only scalp and day trade CFDs. This was also a mental revolution as I had to bury my position of futures trader, oh how narcissistic, abandoning the aristocracy of trading for a greater efficiency and shrugging off the rumours circulating on CFDs. Nothing beats personal experimentation. My only regret is not having switched to CFDs earlier.


Weaknesses of futures for scalping and day trading

Futures, contrary to what some may believe and still read, are no longer the highly liquid market it used to be. In 2004, when I started scalping futures, it was; but it gradually dried up … and affected all the markets. The turning point was 2008. To give you an example, this is the order book of Dax Futures on a normal day in 2013:


order book

Example of an order book on Dax futures: gap, weakness of the order book

We find a gap of 1, the bid and the ask no longer touch each other as before, and if you want to “enter” 20 lots for example, we will have 4 lots at 8378.5, 9 lots at 8379 and 7 lots at 8379.5 on the Dax futures which is the most liquid in Europe! With 20 lots on the Cac 40 FCE, you currently “knock off” the order book, which was unthinkable 10 years ago.

People who say that FCE futures are liquid, as I sometimes read, have not seen an FCE futures order book for the past 10 years … This example is similar to the Dow Jones 30 (YM) futures which constantly has 2 to 3 points gaps which is still very low.

This has immediate consequences on our trading results: a portion of the sale or purchase orders are not (no longer) executed or partially executed on futures even if the price is affected. On American futures, with the algorithmic game and priority orders with CME licenses, professionals pass before us in the futures order book, the “game” is distorted, we are served only at the end of the order books … even when we anticipate well in advance … Do not mince words on American futures, the odds are stacked against us…

Since the futures lot sizes cannot be “adjusted”, we can only enter or exit lots in sizes of 1, it is rigid; we cannot for example enter a profit or a loss partially on a lot by clearing 0.25 of the position and leaving 0.75 there as it is.

The costs are now often higher than on CFDs : by entering the order book or preparing limit orders, commissions + gaps to fill which are often higher than the CDFs spreads + the tick size which is higher on futures .. .

For example, by entering the order books on the Dow Jones futures, I will pay between 2 to 3 points gaps +   lead/return commissions + the tick size of 1 point. On CFDs, all inclusive, I have a fixed spread of 1.8 on the Dow Jones with a tick size of 0.1 … almost twice cheaper. On the Dax, I pay a 1 point spread on fixed lead/return commissions on CFDs with a tick size of 0.1 while on futures I have a 1 point spread on average + lead/return commissions + a tick size of 0.5 …

Order books are empty on futures a few minutes before an announcement. Spreads are not fixed and they can soar. It is not possible to enter or exit, you just have to wait (and sometimes pray) … here again we are confronted with the problem of liquidity … After 6:00 pm … one wonders whether there is still a futures trader alive…


The strengths of CFDs for scalping and day trading

Compared to futures, CFDs offer ABSOLUTE liquidity; the price just needs to be affected for you to be executed, irrespective of the number of lots. It is absolutely revolutionary for scalpers or day traders. We no longer have partially executed orders, no more problems of orders piling in an order book. CFDs have phased out order-books, the CFDs broker guarantees liquidity and this is his problem and no longer ours. In the past, 5 to 20% of my futures scalping trades were not being traded or were partially executed whereas the prices were affected, but now 100% of my orders are perfectly executed…

The consequence is that I no longer hesitate in taking a trade depending on the time. I know that I can exit when I want with a spread that will not soar before an announcement…In fact, some CFDs brokers guarantee the spread; and here we talk of guaranteed spread. This means that even before or after an announcement, the spread remains at 1 while on futures it moves from 1 to 5 or above.

In the example above, the Dax 30 has a fixed spread of 1 on CFDs which means that your 20 lots, your XX lots will all be executed at 8378.5. No more worries about order-books, position in order-books, partially executed orders, slippage or orders that have never been executed while the price has been affected. This changes a scalper’s entire life!!! In this example, the savings are €287.5, 11.5 points, and you also have lead and return commissions to further pay on futures… and no guarantee on the possibility of exiting your 20 lots at a fixed price …

The lot sizes can be adjusted on CFDs; you can buy 1.17 lot, partially resell 0.45 lot if you wish. We can adjust the size as we wish, to about 0.01….

The tick size, which is a disguised spread, is 0.5 on Dax 30 and Cac 40 for example on futures. On CFDs, it is 0.1 for certain brokers. You can buy or sell in the “futures spreads”. On futures, to enter or exit, it will either be at 9000 or 9000.50. On CFDs you can enter or exit at 9000 9000.1 9000.2 9000.3 9000.4 9000.5… It always takes less fees. To earn money or exit flat, the price should not shift by 0.5 like on futures, 0.1 is enough.

There are other benefits, like larger time slots compared to those on futures, the possibility to be more aggressive… but this would take a long time to develop.

Why do scalpers and futures day traders not massively transition to CFDs ?

Due to lack of information and curiosity, and as a result of comfort and habits… the idea that Futures are superior to everything is now old fashioned…. Meanwhile, CFDs have entered the market and have started changing the market and habits. In the beginning CFD brokers got bad press, especially in France, which explains the delay in perception. French brokers tried to preserve their margin by casting doubts on the quality of newcomers but the CFD brokers’ world is actually a large one.

There are about 5 CFD brokers who call the shots in the market. They are powerful and are often listed on the stock exchange, monitored, audited, and checked. Some are even worth billions and they are regulated by AMF and ACP with their accounts guaranteed, segregated etc. One of these CFD brokers is more powerful than the Paris Stock Exchange as he makes transactions of 4 to 5 billion Euros a day whereas the Paris Stock Exchange finds it difficult to go above 3 billion per day…There are also non regulated CFDs brokers, in tax havens who are more like crooks than brokers. Serious CFDs brokers suffer from the image of such companies which only have brokers by name.

The choice of a CFDs broker is crucial; all of them do not offer the same range of services and protection. You should be careful and well-informed. You should thus choose a broker with the AMF and ACP label. We are already sure we have a serious broker, regulated by competent people. Avoid Cypriot brokers regulated by the Cysec.

Not all CFD brokers provide the same types of services; for example my CFD broker offers fixed and guaranteed spreads with a spread of 1 on Cac 40, Dax 30… This means that if the market panics, the spread remains at 1. Some other very serious CFD brokers also propose a spread of 1on Dax or Cac 40 but it is not guaranteed, so in case a situation arises, it can move to 2.5, 10… this is what makes the whole difference between a spread of 1 and a guaranteed spread of 1.

Whatever the case, there is a market change that many futures or shares traders hardly see. You just need to look at the volumes exchanged on the Cac 40 FCE future for the last 10 years to understand that things have changed dramatically…and observe that the share exchanges of alternative platforms are soaring…

Finally what does a futures or CFDs trader want ?

A trader wants to pay less fees, have absolute liquidity, have no slippage, have the guarantee that the prices will remain tradable, be sure of entering or exiting the market when he wants with as many lots as he want, be able to choose the lot sizes, have guarantees on his accounts in case of bankruptcy…AMF and ACP regulated CFDs brokers do so…

I discussed this with my friends on futures, they are sometimes skeptical of the “futures trader status” which is more valorized in the collective psyche, but those who try it often shift very quickly from futures to CFDs.

For example, it is unheard of that I go back and scalp Futures; I will really feel that I am regressing. All that could “eat” my profits, floating spreads, partially executed or never executed orders, difficulties to enter or exit an unsettled market … all this has disappeared. I have my fixed and guaranteed spread, affected price, and my order irrespective of the number of lots is executed… my scalping now is incredibly fluid. I buy, sell when I want, with the quantity I want, I have a more thorough management of my positions by dividing my lots by about 0.01. I no longer have 0.5 tick sizes to reach but 0.1… Admittedly, my shift from scalping on futures to CFDs have soared my monthly profits. On futures I found it hard to survive but on CFDs I have a good life, I no longer have constraints imposed by futures for a scalper or day trader. I prefer to abandon my poor aristocrat title of futures trader for CFDs and additional revenues that it offers me. It is a matter of efficiency…

To conclude, I recommend that scalpers and day traders should transition from futures to CFDs, to at least have the curiosity to try it. This revolutionized my trading and my earnings. The certainty to be served and to exit when I want, to no longer have partially executed orders, to no longer be overtaken in order books by algorithms, to have a guaranteed and fixed spread which enables rapid entry and exit irrespective of the announcement of the period or the day, have full and guaranteed liquidity… and in addition, after a practical analysis, pay less for my entries and exits than on futures… have revolutionized my trading, my earnings and my material life… Be curious, choose a good CFD broker, try…The French are always resistant to new things, but even minitel was finally abandoned for the Internet in 2004. But there is still a long way to go (in France)…

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1 Comment pour Comparing CFDs with futures for Scalping and Day Trading

  1. raphael rosin says:

    Hi Andil,
    Very interesting article, thanks!
    What broker would you recommand for CFDs?

    I agree that on Dax30 futures with 20 lots the average bid/offer spread is 3 points considering the order book. And stop losses are not garanteed and subject to slippage. Very dangerous

    On CFDs I have a few questions:
    – which brokers have tick size on 0.1 pts on Dax 30
    – which brokers garantee the spread is always 1points (even in very volatile markets)
    – do they garantee total liquidity (garanteed stop loss)
    – can you trade 500 eur / points (20 lots) and the liquidity still not an issue on CFDs?


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