Choosing Which Futures Markets to Trade

A signal that works on paper still needs somewhere to trade. Before a trend-following or macro system ever sees live money, someone has to decide the universe: which of the roughly 80–100 liquid futures contracts on the planet actually go into the book. Get the universe wrong and it doesn't matter how good the signal is — thin markets eat the edge in slippage, and a book stuffed with correlated contracts isn't diversified no matter how many tickers it holds.

The three filters

Liquidity. A market needs enough daily volume and open interest that the position can be entered and exited without moving the price against itself. A rule of thumb desks use: never plan to hold a position larger than a small fraction of average daily volume, so an emergency exit doesn't itself become the story.

Cost. Bid-ask spread plus commission plus expected slippage, expressed as a fraction of the contract's typical daily move. A market with a wide spread relative to its volatility can absorb a strategy's entire expected edge before a single trade is profitable — this kills more retail systems than bad signals do.

Correlation to the existing book. Adding the 10th energy contract when the book already holds crude, heating oil, gasoline, and natural gas adds very little true diversification, because they move together in stress. A market earns its place by moving somewhat independently of what's already there — different asset class, different macro driver, different time zone of primary liquidity.

Worked example

A strategy expects to make 0.4% per trade before costs on a lumber future. Lumber's typical bid-ask spread plus expected slippage runs about 0.15% of notional per round trip, leaving 0.25% net — thin but workable if signals are infrequent. The same strategy applied to a random small-cap-index future with a 0.5% round-trip cost turns the identical 0.4% gross edge into a 0.1% loss per trade. The signal didn't change; the market did.

What this means in practice

Most CTA and macro programs settle on a fixed universe of 40–70 contracts reviewed once or twice a year, not re-optimized trade by trade — chasing whichever market recently looked liquid or cheap invites survivorship bias into the selection process itself.