Index and commodity futures

What this lesson resolves

This lesson is for the trader who already knows what a futures contract is and is facing the question: what to trade. It breaks down two market families — indices and commodities — into what moves their prices, and gives you a protocol for comparing two markets with numbers: volatility, tick value, and the cost of entry referenced to your 1R. There is no list of “best instruments” here, because such a list ages faster than you can write it down. There is a method that you build your own ranking from, using the current specification at your broker.

What drives an index: basket, weights, and component replacement

A contract on an index is not a contract on a single stock. It is settled against the value of a basket — a set of stocks selected according to the index provider’s methodology and combined with weights. From this follow three layers that must be understood separately: basket composition, weighting method, and the rule for replacing stocks.

Weights change the character of the move. A capitalisation-weighted index behaves differently from a price-weighted index, and yet differently from an equal-weighted index. In the first case, a few large stocks account for most of the volatility; in the second, a single expensive stock can pull the whole indicator even if its weight in the economy is small. The methodology is published by the index provider, and the information about which version of the index a given contract prices is confirmed by the contract specification at your broker.

The third layer is the environment. Indices are most strongly affected by expectations for interest rates, capital inflows into risky assets, and the calendar of corporate results. The relationship between market sentiment and index direction is described in the lesson Risk-on and risk-off, and the rate mechanism — Central banks. You do not need to know the index composition by heart. You need to be able to answer two questions: how the index weights stocks and how many of the largest positions account for most of its move. Without these two answers, you are comparing names, not exposures.

What drives a commodity: delivery, season, and storage

A commodity has a layer that an index does not: physical backing. A contract may end in physical delivery or cash settlement, and the specification decides this, not the market name or the chart shape. For a retail trader, however, three realities of this backing matter more: storage cost, the seasonal production and consumption cycle, and supply tightness at a given moment.

Seasonality is not a legend, but it is also not a universal calendar that you transfer from one market to another. It results from the cycle in which a given commodity is produced and consumed — it looks different for energy products, different for grain, and different for industrial metals. The specific seasonal calendar and inventory reports are published by the exchange for its contract, and you check whether your broker lists the same instrument. Do not transfer a conclusion from one commodity class to another just because the charts look similar.

Geopolitics is a separate factor. A supply shock can dominate a technically correct setup in one session, because it does not appear in the price history on which you built your rule. On commodity markets, write into your plan what position size you accept at a gap open — that is the only part of this risk that can be set in advance.

Which months are liquid

Liquidity does not distribute evenly across the forward curve. Usually one series — the front month, sometimes the next — concentrates most of the turnover, and further months quote such low volume that their spread describes a momentary quote, not a real market. The practical rule is simple: trade the series for which you see comparable volume and spread in several consecutive sessions, not the one that “looks prettier on the chart.”

Month selection is a cost decision, not an aesthetic one. The spread between series, holding cost, and the moment when volume transfers to the new series are split into two separate lessons: Contango and backwardation and Rolling contracts. Here, the rule is enough: an instrument whose further series you cannot read does not enter the comparison. Before comparing two markets, check that each of them has a month meeting this condition.

How to compare two markets: volatility and tick value

Knowing the market is a bad argument in a comparison, because it speaks about you, not the instrument. Compare two parameters that can be measured: volatility expressed as a fraction of price, and the cost of entry and exit referenced to the distance of your stop. The first measurement you make from quotes, the second — from the specification.

daily_range_pts = high_session − low_session
daily_volatility  = daily_range_pts / close_session
volatility_5_sessions  = arithmetic mean of five daily_volatility

Volatility in percentages is comparable between markets of different notional, because it does not depend on point value. Only the second step introduces money:

tick_pts           — from specification (check with your broker)
point_value_USD — from specification (check with your broker)
stop_distance_pts  = |entry_price − stop_level|
risk_per_contract   = stop_distance_pts × point_value_USD
ticks_per_1R       = stop_distance_pts / tick_pts
spread_cost_R    = spread_pts / stop_distance_pts

The last two numbers answer different questions. ticks_per_1R tells you how finely you can set the stop: the more ticks fit into the distance, the smaller the rounding error and the rarer the stop landing in a random place. spread_cost_R tells you how much you pay for entry and exit in risk units — and that is the number you compare with the expected edge. A market on which spread eats one quarter of your 1R requires a significantly larger edge than one on which it eats one twentieth.

Parameters tick_pts and point_value_USD differ between exchanges, between series, and between brokers — check with your broker before entering them into the worksheet. Calculate 1R from your own stop, in line with the lesson on r-multiple.

Example comparison on illustrative numbers

All numbers below are illustrative numbers. They show the sequence of actions, not the specification of any real contract.

Market A: tick 0.25 pts, point value $20, spread 1 pt, stop distance 20 pts. Market B: tick 0.10 pts, point value $90, spread 3 pts, stop distance 15 pts. Your 1R is $400.

Market A: ticks_per_1R     = 20 / 0.25 = 80
          spread_cost_R  = 1 / 20    = 0.05R
          risk_per_contract = 20 × 20   = 400 USD   → equals 1R

Market B: ticks_per_1R     = 15 / 0.10 = 150
          spread_cost_R  = 3 / 15    = 0.20R
          risk_per_contract = 15 × 90   = 1,350 USD  → over 3 × your 1R

The conclusion from this calculation is not “market A is better.” It is: on market A, one position fits your risk rule, while on market B not even the smallest possible position fits at this stop distance. Market B is not bad because of that — it is inaccessible for this capital size and this stop. Contract availability is part of the comparison, not an addition to it.

Comparison protocol — six steps

Order is part of the procedure. The result must be reproducible: the same readings must give the same decision, even when someone else calculates them.

1. Choose two markets and one liquid month on each. Record series codes and expiry dates from the contract specification. A month you cannot read drops out of the comparison.
2. Read four specification parameters: tick_pts, point value, session hours in Polish time, and required deposit. Check all four with your broker — for the same index, these can differ on two accounts.
3. Measure volatility from five sessions. For each session, calculate daily_volatility, then the average. One day is an anecdote; five days is still a small sample, but already comparable between markets.
4. Set stop distance on both markets. Do not copy the same number of points to both charts — distance results from market structure and volatility, not from habit.
5. Calculate ticks_per_1R, spread_cost_R, and risk of one contract according to the formulas from the previous section.
6. Calculate holding cost for the planned horizon and close the calculation:

entry_exit_cost_R = spread_cost_R + (2 × commission_USD / 1R)
holding_cost_USD     = carry_cost_USD + roll_cost_USD
total_cost_R       = entry_exit_cost_R + holding_cost_USD / 1R

Calculate carry and roll components using formulas from the lessons Contango and backwardation and Rolling contracts. Check commissions, point value, and deposit with your broker.

Comparison worksheet — fill it in yourself

After eight rows — four per market — compare the “Spread cost (R)” and “Ticks per 1R” columns. The first tells you how much you pay for entry, the second how precisely you set the stop. The “Repeated measurement” column has one job: a value that does not reproduce on the second read is a quote artifact, not a market feature.

Correlation: two markets, one risk

Comparing two markets ends with the question of whether it is worth holding them simultaneously. A long position on an index and a second one on a high-beta asset are often the same exposure to “risk-on” sentiment, written on two cards. Then two separate 1R entries in the journal describe one enlarged risk, and the daily loss limit stops working as intended.

Measure this simply: record the daily change of both positions side by side for twenty sessions and calculate how often they moved in the same direction. This is a descriptive measurement, not statistics — it is enough to see whether your “two positions” are in practice one. The tools and limit are distributed in the lessons on correlation and portfolio risk. If it turns out that the markets move together, choose one of them — the one that performed better in the worksheet — not both at once.

When comparison says “do not trade”

1. You do not know the specification of one of the markets. Missing point value, tick, or session hours means you are not comparing markets, only impressions. Fill in the missing number with your broker or drop out of the comparison.
2. The volatility measurement does not reproduce on the second read. A change of an order of magnitude between two measurements from the same session window means noise, not a market feature.
3. The minimum position exceeds your 1R. If the risk of one contract at a sensible stop is larger than the per-transaction limit, the market is inaccessible. Do not round the size up or cut the stop to fit the rule.
4. The choice is based on market knowledge, not measurement. “I know indices, so I stay with indices” is a decision about you. If the worksheet shows an advantage for the second market, lack of change is a decision you record together with the reason.

Common mistakes

• Trading a further month because the price looks more interesting. Lower volume and wider spread cost more than the difference you are trying to exploit.
• Comparing markets by tick alone. Tick without point value and stop distance tells you nothing about cost.
• Confusing an index with its composition. The contract prices a basket with weights, not an arithmetic average of stocks.
• Ignoring season and geopolitics on commodities. Price history does not contain a shock that has not yet occurred.
• Treating two risk-on positions as diversification. Instead of two 1R, you have one larger risk.
• Switching between asset classes every week. Without a constant sample, you have nothing to compare in the worksheet.

Measurable exercise

Choose two markets — one index and one commodity — and one liquid month on each. Perform steps 1–5 of the protocol: record four specification parameters confirmed with your broker, measure volatility from five sessions, and calculate ticks_per_1R, spread_cost_R, and the risk of one contract in USD. Fill in the worksheet, and at the end write one sentence: which market fits your 1R and why. If none fits, the answer is not to change the risk rule, but to change the instrument size.

Common questions

Are indices easier than commodities?

They are often more liquid and more predictable hourly, especially during the American session window. 'Easier' here means that it is easier to collect comparable data samples. It does not mean the result is positive: that is decided by position size and plan, not by the choice of market family.

Where do I get the composition and weights of the index my contract prices?

The methodology is published by the index provider, and which version of it your contract prices is confirmed by the specification at your broker. Do not assume that two contracts with similar names price the same basket — this check takes a few minutes and changes the sense of the whole comparison.

Is volatility in percentages enough to choose a market?

No. Volatility tells you how much movement is in the price, but it does not tell you how much entry into that movement costs. Only combining it with spread cost in R and the risk of one contract in USD gives the answer of whether the market fits your plan. Check the parameters for this calculation with your broker.

Why measure ticks per 1R and spread cost in R if I am choosing a market I know anyway?

Because knowing the market does not change its cost or tick size. Measurement turns 'I know indices' into a number that can be compared with another number — and only then do you see whether the choice results from an advantage or from habit. Without it, two different decisions, staying with the known market and switching to a measured one, look identical in the journal, even though they have different justification. With small capital, however, the most important thing is often not volatility, but whether one contract fits your 1R at all — and that question is resolved by the calculation, not by market knowledge. Confirm tick value, point value, and commission with your broker.