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CFDs vs Futures – Why CFDs are better for prop trading

CFDs are better - Here is why

In this video Simon explains the differences between CFDs and Futures for prop funded trading. CFDs offer a number of advantages over futures but many traders, especially those in the US are not used to trading CFDs. On personal accounts US citizens are prevented from trading CFDs but they can trade CFDs on prop funded trading accounts – and they should. Here is why.

Simon trades both Futures and CFDs to pass funded trading  live in the Trade Room Plus Live Trade Room every day

Hi, this is Simon from Funded Trading Plus. I have extensive experience with trading both CFDs and Futures, so i’m going to explain what a contract for difference, a CFD, is, how it is different from a Futures contract and why we’ve chosen to use CFDs and not Futures for our funded trading program.

Both CFDs and Futures are derivatives. A derivative is a financial instrument where the value is derived from an underlying asset and that asset’s movement.

A CFD is one of many over the counter, OTC, derivatives. This is where the contract is negotiated between two parties directly without the need for an exchange.

A Future is an exchange-traded derivative which means all contracts go through an exchange in a standardised format. An exchange like the Chicago mercantile exchange, the CME.

Both allow us to use leverage and are traded on margin.

At Funded Trading Plus we use CFDs, and this is why.

Position Sizing

CFDs are much more flexible with their positing sizing. CFDs are traded in ‘lots’. These can be thought of as similar to ‘contracts’ in futures. A ‘lot’, much like a Futures contract, is a set price for each instrument being traded.

For example, let us have a look at Bitcoin. Here we can use our mini-terminal tool to place an order in the market and accurately work out our risk.

1 standard lot of Bitcoin is 100,000 units. This means if we want to buy at $50,000, and have our stop at $49,000 – a range of $1000, our risk would be $1000.

Now here’s where the positioning sizing flexibility of CFDs really comes into its own. We aren’t tired to just trading in lots, we also have access to ‘micro-lots’. This is where 1 standard lot is broken down into 100 parts. 

For example, let’s take same Bitcoin order, but we’ll change the position size down to 0.01, instead of 1.00. 

This means the same order at $50,000 with a stop at $49,000 will be just $10 of risk.  

So on one CFD derivative we have 100 different position sizes with just one standard lot. 

This gives us total flexibility to manage our risk. Whereas on a Futures exchange your minimum position sizing, especially for something like Bitcoin, is much higher, which may force you to take on far more risk than you’d like. 

With a CFD you do not need to switch between mini and micro markets. You don’t need to worry about being stuck between contract sizes, it’s all contained within one derivative.

Cost

CFDs do not have a commission cost. The cost to trade is contained within the spread. The difference between the bid and offer prices. 

In order to access cheaper commissions when Futures trading, one usually needs to purchase an expensive licence which can cost $1000 or more. 

The second issue is that funded trading companies will often mark up the commissions even if you have a licence. For example, commissions on the micro-NASDAQ are 51c after paying a $1000 licence. There are several Futures funded trading companies who mark this up to 85c a contract – an increase of over 40% which you pay from your profit, and which adds up to a lot. 

CFDs have a much wider range of markets

Our funded trading offering have over 250 Crypto markets available to trade. The Futures market currently has two.

Liquidity

CFD has far superior liquidity to make sure your trades get executed at the price you want to trade. If you’ve ever traded the YM (the dow jones 30), or the NQ (the Nasdaq 100), you’ll know how thin these markets are and how few contracts are available. The problem is even worse on the micro markets. 

This leads to trades being executed with far worse prices and slippage. Especially when it’s volatile.

Lag

Retail Futures platforms often suffer with lag during volatility. This is even worse when combined with market opens.

Pricing

Futures markets have contract expiries as well as convergence towards the spot or cash price of the underlying market. This makes comparing historical pricing harder, for example equivalent and valid support and resistance levels. 

We use spot or cash price CFDs

Which markets are equivilent

All the Forex and Crypto pairs are obvious from their names. In terms of the big Futures index markets, these are what they are called on our funded trading platform.  

ES = SPX500 

YM = US30 

NQ = NDX100 

Gold = XAUUSD 

Silver = XAGUSD

Platinum = XPTUSD 

Brent Crude oil = UKOUSD 

WTI Crude oil = USOUSD 

Conculsion

We decided to use CFDs for our funded-trading rather than Futures due to position-sizing, cost, the range of markets, liquidity lag and pricing as a far superior product.

You can see the full range of our Funded Trading products here: https://www.fundedtradingplus.com/

Update: Ninja Futures Trader converts to MT5 and passes test in 2 hrs!

Our very first trader to pass our evaluation test is a Futures trader who normally uses NinjaTrader. He converted to MT5 in one day and then passed our $100,000 test in 2 hrs. Impressive. See here: https://www.fundedtradingplus.com/how-this-trader-passed-100000-evaluation-in-just-2-hours/

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