Top Prop Trading Instruments Uncovered
When embarking on a trading career one of the first choices every trader must make is which financial instruments to trade. The markets offer a diverse range of assets including forex, stocks, futures, options and more. In this guide, we will explore some of the major tradable instruments, their benefits and things to consider when deciding what to trade.
Let's dive in and uncover the top instruments for traders!
Currencies
The foreign exchange (forex) market is the largest, most liquid financial market in the world with over $6.6 trillion traded daily. The forex market facilitates the buying and selling of global currencies. Some benefits include:
- Trading 24/5 - Open from Sunday 5PM to Friday 4PM EST.
- High liquidity - Large transactions can be executed swiftly.
- Leverage - Get large exposure with little upfront capital.
- Volatility - Large price moves present opportunities.
- Correlations - Pairs trading and risk management.
- Fundamental drivers - Macroeconomic events move prices.
The eight major currency pairs (EUR/USD, GBP/USD, USD/JPY etc.) are the most liquid. But you can also trade exotic pairs like USD/HKD or USD/SEK. Forex presents exciting trading opportunities but also requires managing risk wisely.
Futures
Futures markets offer leveraged trading in commodities, indices, rates and more. Some popular futures contracts include:
- Commodities - Crude oil, natural gas, gold, silver.
- Equity indices - S&P 500, Nasdaq, Dow Jones, DAX.
- Rates - U.S. Treasuries, Eurodollars.
- Agriculture - Corn, wheat, soybeans, coffee.
Benefits of futures trading include deep liquidity, transparency, regulated exchanges and the ability to go both long and short. Futures are more capital intensive than forex but moves can be explosive at times. They present unique trading opportunities based on roll yields, contango/backwardation and seasonal patterns.
Options
Options are derivative contracts that give buyers the right, but not the obligation, to buy or sell the underlying asset at a preset price on or before a specific date. Two main types are calls and puts. Benefits include:
- Limited risk - Loss limited to premium paid.
- Leverage - Control large notional value with little capital.
- Hedging - Manage risk in other positions.
- Income - Potentially profit on options without owning stock.
- Versatility - Trade based on direction, volatility, time.
Options can be used for speculation and hedging across forex, stocks, futures and more. But specialized knowledge is required to manage concepts like time decay, volatility, strike selection and the Greeks. Options offer versatility but require learning their nuances.
Stocks
Stocks represent ownership in publicly traded companies. Traders can profit from buying low and selling high, short selling, dividends and options strategies. Key benefits:
- High liquidity - Easily get in and out of positions.
- Fundamentals - Ability to research and value companies.
- Stock splits - Opportunity when splits are announced.
- Dividends - Quarterly income from dividend stocks.
- IPOs - Potential to benefit from new listings.
Benefits of futures trading include deep liquidity, transparency, regulated exchanges and the ability to go both long and short. Futures are more capital intensive than forex but moves can be explosive at times. They present unique trading opportunities based on roll yields, contango/backwardation and seasonal patterns.
Choosing Markets to Trade
With the major asset classes covered, how do you determine which instruments to focus on? Here are some factors to consider:
- Skillset - Play to your knowledge and experience base.
- Strategy fit - Which assets align with your trading strategy?
- Volatility needs - Higher or lower volatility personality?
- Liquidity needs - Execution quality and slippage concerns.
- Risk appetite - Higher leverage/risk vs lower risk tolerance.
- Time availability - More or less time to research fundamentals.
- Account size - Need $25k+ for day trading U.S. stocks.
- Funding - Which instruments are available through your prop firm?
Evaluate your trading plan objectively across these factors. While you can diversify over time, it is best to master one market at a time early on. Aligning your trading instruments with your strengths and preferences will optimize your odds of consistency.
Start Trading Today
Financial markets offer a diverse menu of trading vehicles. As you embark on your trading journey, thoughtfully selecting which instruments to focus on is a key strategic decision. Markets have differing characteristics in terms of volatility, liquidity, fundamentals, correlations and technical patterns.
As a funded trader with FundedTop, you have the potential opportunity to receive funding across a range of instruments like forex, crypto, stocks, options and futures. Based on your skills, experience, strategy and risk preferences, we can provide insights on which asset classes may be best suited to you. The ideal combination allows you to play to your strengths while managing risk and maximizing opportunities.
With this foundation on the major tradable instruments, you can make informed, strategic choices on what markets to trade. Pair this with robust risk management and your trading plan has the potential to thrive across a variety of market conditions.
