Directional Potential of Popular Futures Contracts

The instruments you prefer is, naturally, a personal decision. Like choosing a car or choosing a spouse. Even though we all want to make good choices, and many of us (myself included) do extensive homework on out options, sometimes we still make… well… bad choices.

Every now and then I see traders who, for one reason or another, are trying to fit the proverbial square peg in the round hole. Said another way, they’re trying to trade against their nature, and/or their instrument’s nature. Understanding and being in tune with your instrument is an important part of trading success.

OK, sure, but why should you care?

Well, for starters I think we all should make sure our (discretionary) trading style (or automated strategy) is a good fit for what we’re trading. For example, are you a trend trader? Do you like breakouts? Are you most comfortable (and successful) trading from the outside in? Most instruments in a certain class (equities, commodities, credit, etc) tend to behave similarly, but each of them has distinct personalities. I’m not going into that level of detail here, but I wanted to share some data on how various futures contracts (and even a few high-flying stocks) tend to move.

Methodology: For all instruments in this study I used the prior 2 years of 15 minute bars covering all hours that instrument trades. For each bar I marked the median price of that bar, then looked to see if the next bar’s range included that median price. If not, I considered that bar directional. That is to say, it wasn’t just a big range bar but one that had follow-through in a specific direction in the next bar.

Period: March 18, 2016 – March 20, 2014

Instruments in Study: ES, NQ, YM, ZN, ZB, CL, ZS, ZW, 6E, 6J, FDAX, FB, AAPL, AMZN, NFLX, GOOG


Discussion: The numbers at the bottom of the graph can be viewed as probabilities. That is to say, for any given bar in the study the probability of the next bar being directional is X%, where “X” is the number at the bottom of the graph. As you can see, overall there aren’t huge differences in the “directional potential” of any of the instruments in the study but what should jump out at you is just how mean-reverting all the instruments actually are.  About 2/3 – 3/4 of the time, in any given 15 minute bar, the next bar will touch that mean (H+L/2 = mean or median) price.

That said, the differences are enough that you might want to double check that style and strategy matches your favorite instrument’s intrinsic nature and behavior. For example, if you’re a reversion trader (you like to buy dips and sell rips intraday) then the ES or ZN, with its’ strong affinity for reversion, should be instruments of focus. On the other hand, if you’d rather jump in on breakouts and range extensions, then other instruments with higher numbers’d be more suitable for your style.

There are all kinds of ways to further pinpoint solid probability opportunities using just this simple pattern on all time frames. But that, gentle readers, I’ll leave to you to explore on your own.

Until next time, trade ’em well.