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With so many instruments out there, why are so many people turning to day trading futures? This page will answer that question, breaking down precisely how futures work and then outlining their benefits and drawbacks. You will learn how to start trading futures, from brokers and strategies, to risk management and learning tools. Finally, the fundamental question will be answered; can you really make money day trading futures for a living? Before we take a look at how to start day trading options and indices futures, it helps to understand their humble origins.
Futures contracts are some of the oldest derivatives contracts. They were born from a need for farmers to hedge against changes in the prices of crops, between planting and harvesting. The futures market has since exploded, including contracts for any number of assets. A derivative is when a financial instrument derives its value from the price fluctuations of another instrument.
The futures contract has a price that will go up and down like stocks. In fact, your futures chart will probably look similar to your stock chart, with opportunities to buy low and sell high.
Instead, you pay a minimal up-front payment to enter a position. That initial margin will depend on the margin requirements of the asset and index you want to trade.
Day trading futures vs stocks is different, for example. You are not buying shares, you are trading a standardised contract. Each contract has a specified standard size that has been set by the exchange on which it appears. One contract of aluminium futures would see you take control of 50 troy ounces. The FND will vary depending on the contract and exchange rules.
Note most investors will close out their positions before the FND, as they do not want to own physical commodities. The last trading day of oil futures, for example, is the final day that a futures contract may trade or be closed out prior to the delivery of the underlying asset or cash settlement.
Usually, most futures result in a cash settlement, instead of a delivery of the physical commodity. This is because the majority of the market is hedging or speculating. You will need to take into account unpredictable price fluctuations in the last trading day of crude oil futures, or natural gas futures, for example. But before you start trading, you need to get to grips with your chosen asset, as the quantity of different futures varies.
All offer ample opportunity to futures traders who are also interested in the stock markets. On top of that, there are several other markets that offer the substantial volume and volatility needed to turn intraday profits. However, before you put all your capital on the line, remember each market has its own attributes and careful analysis is needed to uncover the right market for your individual trading style and strategies.
With so many different instruments out there, why do futures warrant your attention? For five very good reasons:. Whilst the stock markets demand significant start-up capital, futures do not. You simply need enough to cover the margin. With options, you analyse the underlying asset but trade the option. However, your profit and loss depend on how the option price shifts. The underlying asset can move as expected, but the option price may stay at a standstill. Futures, however, move with the underlying asset.
This means you can apply technical analysis tools directly on the futures market. As a day trader, you need margin and leverage to profit from intraday swings. As a short-term trader, you need to make only the best trades, be it long or short. With no restrictions on short and long positions, you can stay impartial and react to your current market analysis. Whereas the stock market does not allow this. You are limited by the sortable stocks offered by your broker.
You have to borrow the stock before you can sell to make a profit. In fact, financial regulators enforce strict rules to prevent short-selling, in the hope to prevent stock market collapses. Because there is no central clearing, you can benefit from reliable volume data.
Getting reliable volume data from a forex dealer is impossible, as forex trading is decentralised, so nobody has all the information. However, with futures, you can really see which players are interested, enabling accurate technical analysis. Despite there being numerous reasons for day trading futures, there remain two serious disadvantages. It can be extremely easy to overtrade in the futures markets. Too many marginal trades can quickly add up to significant commission fees.
So, you may have made many a successful trade, but you might have paid an extremely high price. Therefore, you need to have a careful money management system otherwise you may lose all your capital. Trading psychology plays a huge part in making a successful trader.
But because you can start trading futures with such minimal capital, you have even greater psychological pressures to overcome. This is because you simply cannot afford to lose much. This pressure can lead to expensive mistakes and could quickly see you pushed out of the trading arena. Day trading futures for beginners has never been easier. Technology has ensured brokers, accounts, trading tools, and resources are easier to get hold of than ever.
So, how do you go about getting into trading futures? Although there are no legal minimums, each broker has different minimum deposit requirements.
E-mini futures have particularly low trading margins. Margin positions vary from broker to broker, however, TD Ameritrade and NinjaTrader offer attractive margin deals.
This is one of the most important investments you will make. Most intraday traders will want a discount broker, offering you greater autonomy and lower fees.
What should you look for from a futures broker then? Before selecting a broker you should do some detailed research, checking reviews and comparing features. For more detailed guidance, see our brokers page. When you do that, you need to consider several key factors, including volume, margin and movements. Look for contracts that usually trade upwards of , in a single day.
Margin has already been touched upon. Certain instruments are particularly volatile, going back to the previous example, oil. This means you need to take into account price movements. Fortunately, you can establish movement by considering two factors: A simple average true range calculation will give you the volatility information you need to enter a position.
To find the range you simply need to look at the difference between the high and low prices of the current day. So, what do you do? Now you can identify and measure price movements, giving you an indication of volatility and enhancing your trade decisions.
So, with an understanding of comparing volume, volatility, and movement between future contracts, what should you opt for? Crude oil is another worthwhile choice.
Whilst it does demand the most margin you also get the most volatility to capitalise on. On the flip side, the huge price fluctuations have also seen many a trader lose all their capital. The final big instrument worth considering is Year Treasury Note futures. Viewing a 1-minute chart should paint you the clearest picture. Whether you are interested in day trading strategies for Emini futures or Dax futures, all the points and examples below are applicable. Charts and patterns will help you predict future price movements by looking at historical data.
The best strategies take into account risk and shy away from trying to turn huge profits on minimal trades. Below, a tried and tested strategy example has been outlined. To do this, you can employ a stop-loss. You should also have enough to pay any commission costs. Another one of the best futures day trading strategies is scalping, used by many to reap handsome profits. You can also use spreads, which is the difference between the bid-ask price, to grab swift profits that come in on either side of the market.
This makes scalping even easier. As you can see, there is significant profit potential with futures. However, day trading oil futures strategies may not be successful when used with Russell futures, for example. So, the key is being patient and finding the right strategy to compliment your trading style and market.
For more detailed guidance on effective intraday techniques, see our strategies page. Turning a consistent profit will require numerous factors coming together. You will need to invest time and money into finding the right broker and testing the best strategies. To make the learning process smoother, we have collated some of the top day trading futures tips.
The most successful traders never stop learning.