The Bund future: ideal for the novice trader?

One of the main criteria which makes a financial instrument interesting for active daytraders is its volatility. Volatility is essential to profitable trading. But other criteria are also important.

The majority of traders trade markets which are well-known for their volatility and liquidity such as the DAX index, the DOW Jones, crude oil or the EUR/USD. Probably over 80% of traders operate in these markets. The novice trader should nevertheless ask himself the question if these traditional popular trading markets are also those in which he should operate.  Novice traders tend too easily to replicate what other, more experienced, traders do.

Keeping costs in mind

Costs are an important component in trading. Novice traders will focus on commissions and other costs charged by their broker. The brokerage market is very competitive. In many cases higher commissions can be justified by better and faster technology, order execution and quotes. A trader should not per definition opt for the cheapest broker, assuming they are all the same. A trader who looks beyond broker commissions will notice the existance of other costs which play a role. The exchange fees, which brokers must charge and hand over to the futures exchanges, are also relevant. If the broker applies a commission of $ 2,20 and the exchange fee is $ 1,19 (Mini DOW) then the exchange fee represents 35% of a trader’s cost.

When comparing exchange fees the trader will notice that the most popular trading instruments are not necessarily the cheapest to trade. The trader will also notice that European exchange fees are much lower than U.S. exchange fees. A trader trading 1000 DAX instead of 1000 DOW, pays, assuming a 1:1 EUR/USD exchange rate, 690 EUR less.

Popular trading instruments and their exchange fee

Mini DOW (YM) :                1,19 USD

DAX (FDAX) :                       0,50 EUR

Mini-DAX (FDXM) :            0,25 EUR

Eurostoxx 50 (FESX) :        0,30 EUR

Bund Future (FGBL) :        0,20 EUR

Bobl Future (FGBM) :        0,20 EUR

The Mini Dow has the highest exchange fee. The exchange fees drop dramatically in the case of European futures. In particular the German Eurex market (Frankfurt) has made its Mini-DAX future attractive for retail investors. But the lowest exchange fee is applied to both the German government bond futures, Bund and Bobl.

Popular trading instruments and their margin requirement

The novice trader should also familiarize himself with the margin requirements, not only because he probably trades a smaller account being a beginner but also because it is a factor related to position management. More about this later. The required margin is a function of the size of the contract and the risk. These are the intraday margin requirements of some popular financial instruments:

Mini DOW (YM) :                1288 USD

DAX (FDAX) :                       9920 EUR

Mini-DAX (FDXM) :            1980 EUR

EUROSTOXX 50 (FESX) :   1415 EUR

Bund Future (FGBL) :        1016 EUR

Bobl Future (FGBM) :        480 EUR

The Bund future has one of the lowest margin requirements. For the same margin requirement a trader can either buy 1 DAX future or 9 Bund futures. Although trading 9 contracts is more expensive than trading 1 contract, it does offer the trader more opportunities for building and reducing positions at an identical margin requirement. Something to think about.

What is the Bund future?

The Bund future is a future contract issued by the German Eurex market on a fictive government bond (Federal Republic of Germany) with a coupon of 6% and a duration of 10 year. The nominal value of the contract is 100000 EUR. The value of 1 basis point (0,01) is 10 EUR. At the current market price of 160,00 a position of 1 future has a value of 160000 EUR.

Bund future volatility

Traders who believe that the Bund future’s volatility cannot compare, for example, to the volatility of the of the DAX or the EUR/USD should take a look at the charts.

Bund future, 60-minute chart

100-point movements are not rare, although this may partially related to the fact that the Bund future is at the time of writing near its all time high. Nevertheless, there is sufficient volatility for a well-organized trader to regularly unlock some trading profits. In the next articles in this series on the Bund future we will explore some Bund trading set-ups.