Traders seem to be drawn to the worst imaginable trading markets. Spot forex, crypto, CFDs, hell even stocks. I get that sometimes there are reasons when we’re talking about a large fund that needs a diversified portfolio etc. But for retail traders it doesn’t make sense to trade anything that doesn’t offer at least the following:

1. Leverage
2. Transparency
3. Data Integrity
4. Tax Advantages (wherever possible)

So what markets am I deeming as “crap” and why? Let’s get into it now.

SPOT FOREX

May as well start with the worst of the worst. Spot Forex (so I’m talking true Forex, not currency futures) has got to be about the worst possible trading instrument imaginable, yet people flock to it like snails to the bait we set out in the yard (OK, so “moths to a flame” works too).

Forex is so much worse than many people realize. It has the worst of all possible worlds, not only can it be highly volatile and has no real volume data, it has the added fun of currency exchange rates, government market manipulations, and as if that wasn’t enough – your broker is your competitor! Too many retail traders seem not to know this, that you are literally trading against your broker. This is how there can be “commission free” trading. They don’t need commissions because they profit on every trade no matter what! If you’re a broker you can even set at the data-feed level, the margin you want built into the prices that your customers receive. It’s horrendous.

But I get why people are so often drawn to it. You can get started for almost nothing. $100 can open you an account and get you started trading in some cases! Which of course anyone who’s been around trading any length of time will tell you, is way too little capital to do anything meaningful. You’d be better off setting a $100 bill on fire – at least you’d get a moment of warmth and a pretty flame.

CRYPTO

OK full disclosure time here. I own crypto. I’ve been involved in it in various ways since 2014. I’m no “whale” by any means, but I do have a long term belief in it for reasons that don’t belong here. However, I no longer “trade” it. Ever. And I have done… I was quite active trading in 2016 through into 2018. I mostly ended up with a massive headache and a huge tax bill. Had I never tried to time a single market once, I would be in a wildly different place than I am now.

Yeah yeah woulda, coulda, shoulda. Whatever. The main point here is that I had my eyes opened to the (rather obvious, if I’m honest about it) reality that in crypto there’s no reliable volume data. How could there be when nothing is centralized? Now I know that the whole idea behind crypto is “decentralization” and that certainly has its advantages. But as a trader who’s looking to time my entries and exits to “take the money and run”, the absolute last thing I ever want to trade is something where I can’t see the volume in a full and transparent fashion. In crypto it’s basically the “wild west” and nothing is regulated (yet, anyway). This means exchanges can open up shop and start allowing trades. And those trades don’t have to pass any particular scrutiny, which means things like “wash trading” are a normal, everyday occurrence (Google it if you’re unfamiliar with the term). So any volume data you look at from a crypto exchange, is questionable at best and completely fake at worst.

LISTED CRYPTO FUTURES

OK so this is sortof a “bonus item” since technically these are futures that trade on a “proper” exchange, BUT here’s the main problem I have with them. The leverage on them is terrible, generally requiring that you put up 50% of the full value of the position just to place the trade in the case of Bitcoin (well over $100k as of this writing). Can you make money with them? Yes absolutely, like anything. But there are still better, more efficient choices for the retail trader.

CFDS

CFD stands for “Contract For Difference”. They aren’t too widely known within the USA because they’re illegal here, but they’re very popular in many countries of the world. Basically they’re a simple bet on the direction of the price of something, and they’re traded “Over The Counter” using brokers which means that essentially CFDs have all of the problems inherent to Forex.

STOCKS

Trading shares in a company is extremely popular, but again we have generally very poor leverage (in many cases you have to put up 100% of the value of the shares you’re buying, most retail margin accounts will give you maybe 2:1 leverage), truly awful tax treatment (in the USA anyway, short-term capital gains are brutal), various rules & regulations if you have a small/retail account (Pattern Day Trader rule in particular), no centralized exchange, “dark pools” where large trading happens “off the books” and is not visible in your trading platform, market makers potentially taking a piece of your trades, payment-for-order-flow, and so many other things that I’m going to just stop here. Stocks have certain advantages for the “investor” who wants to truly own a portion of a company. But as a retail trader? I haven’t touched a stock in years and have no plans to do so again any time soon.

OK so I’m sure you can tell where this is going. “Gee JVC that was quite a wind up just to tell me that I should be trading futures!” Yeah, you’re right it was. But I’m frequently amazed at how many people are trading some/all of the above markets without actually understanding what they’re trading or why they would be better off looking at futures. Let us count the ways…

1. Centralization. Knowing that every single participant who trades the ES (S&P 500 Futures) is doing so on one exchange – the Chicago Mercantile Exchange – means that it’s a fairly level playing field and all of the volume is actually visible to me even though I’m an insignificant speck in the market.
2. Liquidity. I will never, ever, ever run into problems getting a fill on my 1 lot. Or my 5 lot. Or my 10 lot. Heck unless I start slinging say 50 lots or bigger, nobody is ever going to even notice I exist.
3. Transparency. The futures markets show you everything that is going on. And in the last few years the information we can get access to in real time has matured at an amazing rate. We now even have MBO Data (Market By Order) which means we can see each participant’s order and its size – not just total volume in the book, but volume per order. So I can tell if those 400 lots sitting on a price are 400 1 lots, or a single player with an account big enough to sling 400.
4. Leverage. Futures give you phenomenal leverage which is of course a double-edged sword. It does mean you can lose more than you even have in your account if you’re reckless with it, but if you understand it, you can magnify the impact of your trades substantially. With many brokers, just $500 of margin will give you control over over $200,000 worth of the S&P 500.
5. Flexibility. I can open a futures account with just a few thousand dollars (much less even in some cases) and start trading. There are no rules around “pattern day trading” and I can basically do whatever I want with my money; nobody is gonna stop me. Also now that there are micro contracts for the main indices (and now even oil has joined the micro party!) we retail traders can trade very small when conditions call for it, so that we don’t take on too much risk for our accounts – or so that we can slice our larger trade up into smaller portions for greater control.
6. Taxation. This one will of course vary depending on your country, but in the USA anyway, futures are taxed on a “blended rate” of short and long term capital gains. You can look it up if you want but the bottom line is that futures are taxed way less than most anything else. Also, the reporting of your futures trades when tax time is here, is done via a 1099 which means you essentially just put one number down on your tax form and call it a day. I once had to submit a tax return that was over 200 pages due to the itemization of all my individual crypto trades!! (face palm emoji!)
7. Chronology. Sorry, I was just trying to keep with the one-word theme here. 😉 Futures are open for trading almost 24 hours a day, 6 days a week. Also there are futures on exchanges all around the world so if you really want to, there is generally something available to trade nearly every hour of nearly every day

I’m sure I could keep this list going, and I’m sure by now you’ve figured out that I’m a huge fan of futures. I used to think they were these really scary things only for the super-rich, hedge funds, or farmers/oil companies/etc. But now I see that for the small retail trader, there is actually no better instrument anywhere on the planet – but you better respect them. Learning to trade futures effectively is not easy, but it’s an investment of your time and effort that can pay you back forever.

Until next time, trade well!

Jonathan van Clute
Community Manager, Trading Research Group