Why do so many people turn to trading futures, with so many instruments out there? This overview will address the question, specifically breaking down how futures work and then explaining their advantages and disadvantages. Through brokers and tactics, to risk management and learning resources, you’ll learn how to start trading futures. Eventually, the basic question will be answered; can you really make money trading futures?
What Are Futures?
A Quick Look at History
It helps to consider their humble roots before we take a look at how to commence trading options and indices futures.
Some of the oldest derivatives contracts are futures contracts. They were born from a need for farmers to hedge, between planting and harvesting, against changes in crop prices. That’s why many of the futures still traded today are commodities like beef, plus wheat and corn grains.
Since that time, the futures market has exploded with contracts for any variety of properties. Today you can deal in precious metals such as gold, industrial metals such as titanium, securities such as the S&P 500, and treasury bonds.
The idea of futures can sound somewhat vague at first, but it’s actually shockingly straightforward.
A derivative is when a financial instrument derives its value from another instrument’s price fluctuations. The value of a stock correlated with the S&P 500, for example, is simply a function of price fluctuations within the S&P 500.
Yes, the S&P 500 is a cash index, assembled into a contract that trades just like stocks. The futures contract has a price going up and down like stocks. In reality, your futures chart would likely look similar to your stock chart, with incentives for low buying and high selling.
When you trade futures, one important component is leverage. Which means when you make a deal, you don’t have to pay for the whole contract. Alternatively, you are paying a minimum upfront cost to reach a position. The initial margin will depend on the margin requirements of the asset you want to trade and the index.
As a trader. knowing the nuances between different futures is critical. For example, trading of futures vs stocks is different. You don’t buy shares, you trade a regular contract. Every contract has a defined standard size, set by the exchange it appears on.
Let’s assume the aluminum futures contract size is 50 troy ounces. One aluminum futures contract will see you take possession of 50 troy ounces. If the aluminum price changed by $2, you will see a $100 ($2 x 50 ounces) benefit.
Below are two words that you can sometimes hear, and need to understand:
First Notice Day
A futures trading first notice day (FND) arrives the day after an investor who bought a futures contract may be required to physically deliver the underlying product of the contract. Depending on the laws of contract and trade, the FND can differ.
Remember that most investors would close their positions before the FND, because they do not want to own physical products.
Last Trading Day
For example, the last trading day of oil futures is the last day on which a futures contract may trade or be closed until the delivery of the underlying commodity or cash settlement. Some futures typically result in cash settlement, instead of physical commodity delivery. That is because the rest of the business hedges or speculates.
For starters, you’ll need to calculate in volatile price swings on the last trading day of crude oil futures, or natural gas futures.
But you need to get to grips with your chosen asset before you start trading, as the sum of different futures varies.
Best Markets for Trading Futures
We touched on some of the assets that you can trade, but what other options are there, and which market provides the best potential for the switched on intraday trader?
The E-mini S&P 500 is the place to go, many would say. With a mere $3,500 margin, you can trade about $75,000 in stock, making it open to all traders. You will note that E-mini S&P futures are all traded electronically, ensuring fast execution speeds and exciting opportunities for automated software trading.
Take into account the prospect of E-mini Nasdaq, E-mini Russel futures, and Dow futures as alternatives. All provide enough space for futures traders who are also active in stock markets.
On top of that, there are many other markets offering the considerable volume and volatility needed to make profits intraday. Soybeans, cocoa, natural gas, Japanese yen, Euro FX, crude oil and the 10 Year T-Notes are all worth a look at.
Before putting all your money on the line, though, note that each market has its own characteristics and careful research is required to discover the right market for your particular trading style and strategies.
Why Trade Futures?
Why do futures merit your attention, with so many different instruments out there? Five very strong reasons for this:
1. Low Cost
Although the financial markets need significant start-up capital, futures do not. You can open an account with less than $5,000, and start trading.
And the best part, you don’t even have to hold the amount. Just enough to fill the margin. Typically the margin is about 3-9 percent of the full contract value, so you just just need a few hundred dollars of balance.
2. Futures Shift With The Underlying Asset
You evaluate the underlying asset with options then exchange the option. Your benefit and loss does, however, depend on how the price option changes. The underlying asset may change as planned but the price of the option will stay at a standstill. Yet futures shift with the underlying asset.
This means you can explicitly apply the fundamental analytical methods to the futures market. You don’t need to think about derivative [ricing issues.
3. FINRA’s Pattern Trading Rule Does NOT Apply
You will hold at least $25,000 in your trading account if you meet the minimum criteria (using a margin account, trading the same security more than four times within five days etc.).
As a future trader, to benefit from intraday fluctuations you need margin and leverage. Fortunately, if you’re futures online trading, this law doesn’t apply. It gives thousands of people who otherwise could not meet the stringent standards set by FINRA access to the markets.
4. Zero Restrictions On Short-Selling
As a short-term trader, you just need to do the right trades, whether long or short. With no constraints on short or long positions, you can remain unbiased and respond to your current market analysis.
But this is not permitted by the stock market. You are constrained by your broker’s offering sortable stocks. To make a profit, you must borrow the stock before you can sell it. In addition, financial regulators impose stringent rules to discourage short-selling, in the hope of preventing collapse of the stock market.
5. Reliable Volume Data
You will benefit from accurate volume data, as there is no central clearing. It’s difficult to get accurate volume data from a forex trader, since forex trading is decentralized, and no one has all the details. For futures, however, you can really see which players are involved, allowing for detailed technical analysis.
While there are various reasons for trading futures, two major drawbacks remain.
In the futures markets it can be incredibly easy to overtrade. Too many marginal trades can add up to large commission fees very quickly. So, you may have made a good trade, but you may have paid an incredibly high price.
When you have $25,000 in your account and trade one S&P E-Mini deal, you can pay from $7,500-$12,500 in commissions per year. That would mean that to break even you would need at least a 25 percent return. You must therefore have a careful money management program or you could lose all of your savings.
2. Low Capital
The psychology of trading plays a major part in making a good trader. Yet since you can begin to trade futures with such limited resources, you have to resolve far greater psychological pressures. This is basically because you can’t afford to lose anything. This pressure can lead to costly mistakes, and could see you forced out of the trading arena quickly.
How To Start Trading Futures
For beginners, trading futures has never been simpler. Software has made it easier to get hold of brokers, accounts, trading devices and services than ever before. So, how do you get into futures trading?
Minimum Capital Requirements
It’s one of the most open markets, since they need less capital than stocks, but more than fx. Even though there are no legal minima, there are specific minimum deposit criteria for each broker.
E-mini futures have particularly low margins for trade. You can find brokers with the E-mini S&P 500 futures offering only $500. So, you will need $500 and enough to cover in your positions some trade margins and price changes.
Margin positions vary from broker to broker, but lucrative margin offers are provided by TD Ameritrade and NinjaTrader.
Choosing A Broker
It is one of the most important investments that you’ll make. Many intraday traders choose a discount broker, which allows you more flexibility and lower fees. What are you looking for then in a futures broker?
- Fees – Opt for a broker with a competitive and transparent fee structure. With frequent trading, commission fees soon pile up, so make sure they won’t eat into all of your profit. It’s also worth seeing whether they have any additional costs, such as withdrawal and penalty fees.
- Customer service – You need a quick solution if you have a problem. It could cost you money every second. So, search for feedback to ensure the broker provides reliable and fast client support. Some brokers will offer 24/7 support in a number of languages, through calls and online chat. In addition, they will be able to provide you with updates on futures day trading hours, including on presidents’ day, plus trading hours on New Year’s Day and Labor Day.
- Trading software – How nice is the provided trading platform? Do they provide all the charts and technological resources required to carry out the analysis? Will you have to pay for the extra features? Does the program also allow for fast execution speeds and easy navigation?
You should do some thorough research before selecting a broker, reviewing feedback and comparing features.
Picking A Future
If you’re working with a broker and there’s cash in your account, you’ll have to pick a contract for the futures. In doing so, several main factors need to be considered, including volume, margin and movements.
Look for contracts that normally transact in a single day up to 300,000. You’ll also know that at the rates you want you can buy and sell, and there’ll probably still be another trader there to buy and sell from you.
Some of the most commonly traded futures contracts on sale are:
- E-Mini S&P 500 (ES)
- Eurodollar (GE)
- 10-Year Treasury Note
- Crude Oil WTI (CL)
If you’ve found a contract with plenty of value, then you’ll need to adjust the margins and movements to suit your style of trade.
Margin has been commented on before. Your broker will decide how much money you will need to reach a position, depending on the margin deals the broker offers. For example, crude oil will always need high margins so you’ll need a bigger account to trade it.
Many instruments are extremely unpredictable, reverting to the illustration above, oil. This ensures that you need to take demand fluctuations into account.
Luckily, by considering two variables, you can determine movement: point value, and how many points your future contract usually moves within a single day. A simple average true range estimate will give you the details you need to enter a position on volatility.
To find the amount you need just look at the gap between the current day’s high and low rates. But, consider futures markets that have a price difference, putting the price action of today beyond the price action range of yesterday. What to do in that case?
- True high – Today’s high or yesterday’s close (whichever is higher)
- True low – Today’s low or yesterday’s close (whichever is more low)
- True range – The real high minus the real low
Now you’ve figured out the true high and low, if the bond closes at 90 on one day, then gaps open higher at 91, and hits an intraday peak of 92, then the real range will actually come out as:
- True high – 92
- True low – 90 (yesterday’s close, which was lower than the low of today)
- True range – 92 – 90
You can now recognise and calculate price fluctuations, providing you with an indicator of uncertainty and enhancing your trading decisions.
Utilizing These Factors
So, what do you opt for when equipped with an understanding of comparing volume, uncertainty and shifts between future contracts?
E-Mini S&P 500 futures provide an ideal starting point for a new intraday trader. You can get margins of as little as $500, and you have more value than crude oil. You will also find that you have enough action to make steady profits, plus you can start trading on your account with just as little as $3,000.
A more worthwhile option is crude oil. As it needs the most margin to capitalize on, you also get the most uncertainty. When you are searching for the greatest income, a lot of people have found money in the oil market. On the flip side, the massive swings in prices have also seen many traders losing their entire resources.
The last great instrument worth considering is the futures of a 10-year Treasury Bond. You can get plenty of volume, but not the same as with S&P 500 futures. You’re not going to get as much volatility as you do with oil because there’s still movement of the price. Looking at a 1-minute chart will paint the clearest picture for you.
If you’re interested in daytime trading strategies for Emini futures or Dax futures, all of the following points and examples apply.
When you are set up and in the market crosshairs, you will have to use innovative tactics to make a profit. Whatever approach you chose, fundamental research will need to be used. When looking at historical data, the charts and trends will help you forecast potential price movements.
Nonetheless, your initial review will help you determine which factors are influencing the performance of your instrument. For example, if you were to trade futures on Treasury Bonds, you would like to examine the basic factors that drive bond prices. You would probably want to look at economic activity and strategy, supply and demand, investors sentiment, and keep in touch with recent news announcements.
If you were going to start online trading wheat futures, you might want to look at other variables. Perhaps you’d like to get to grips with weather forecasts and find out about crop production, alternative crops, plus transport costs.
Risk & Examples
The successful tactics take risk into account and shy away from attempting to turn large profits on small trades. A tried and tested description of the technique has been illustrated below.
Let’s say you’ve got $8,000 in your trading account and you’re looking for a win rate of 55 percent. Only 1 percent of your capital you are willing to lose, so $80 a trade. You should hire a stop-loss to do this. You will place a stop-loss order of five ticks from the entry price, and a target that is nine ticks away.
Now, your trade risk could be five ticks x $13.50 = $67.50 which is less than your peak risk of $80. You will have enough to pay for any commission expenses, too. If you can make that incentive on 55 per cent of your trades, you’d have a decent monthly profit left.
If you increased your risk ratio to 2 percent (as some traders do), you could trade two contracts and theoretically double your income. But get it wrong and you’ll be paying a higher amount.
Many of the best trading techniques for day-to-day futures is scalping, which is used by many to make good profits. The aim is to reduce your losses to only one or two ticks while taking gains, nearly as soon as you get them. Spreads, which is the gap between the bid-ask price, can also be used to grab swift profits that come in from either side of the market. That encourages scalping even more.
Scalping needs a large number of trades, but if you have time, it can help reduce losses while maximizing profits.
As you can see, the potential for benefit with future is big. For example, when used with Russell 2000 futures, day trading oil futures strategies can not be effective though. The goal is to be cautious and find the right approach to complement your style and market.
See our techniques page for more comprehensive advice on the successful intraday techniques.
Turning a consistent profit would involve the coming together of multiple factors. Investing time and money in finding the right broker and checking the best approaches would be important. We’ve collated some of the best day trading futures tips to make the learning process more smooth.
- Do have a strategy – You need to be prepared well. The trial and error technique would see the account balance hit null quickly. So backtest your plan against the market until you have made it your own form of art.
- Retain restraint – So many traders struggle because they are unable to control their emotions. When you have backtested your strategy, you know it’s going to be successful, so don’t give in fear or greed. Let the maths direct and remain focused.
- Be cautious about margin – Though global day trading futures margins can help boost profits, don’t let yourself be drawn in too deeply. Hold your risk small and your margin moderate, and never lose so much that you’re out of the game for good.
- Practice first – Whether you’re day trading commodity silver futures or index futures, a practice account is a perfect way to get to know the markets and build a plan. Furthermore, simulators for day trading futures are financed with virtual money, so you don’t have to gamble real capital until you feel comfortable.
- News – In reaction to news reports, your instrument could boom or plunge in price. And, for something that might impact your positions you need to have your ear to the ground. Some credible outlets include Business Insider, Yahoo Finance, CNBC and.
Never end learning – because neither do effective traders. The markets change, and you need to adapt. You need to use the wealth of learning opportunities around you to do that. So, if you’re considering day trading futures, consider:
- Books – Get comprehensive strategies, and hear tales and tips from some of the world’s most popular traders.
- Blogs – Remain up to date with market trends as online forums are imparted to traders. They’re a great place to go for cool tips on cool day trading futures.
- Courses/tutorials – Learn from active traders about technical research and new strategies. You will also get advice on futures day trading signals and the best indicators for setting up your chart.
- Videos – For example, day trading oil futures videos allow you to follow experts as they trade and learn useful tricks.
- Pdf – They’re perfect for open trading, allowing you to get the right chart configurations and apply real-time strategies. Remember the day trading futures on grains PDF by David Bennett.
- Trading rooms – Live futures day-trading chat rooms are excellent information sources. You should track others as they trade when answering questions and taking advantage of top tips. It’s worth trying any of the top 5 futures day trading rooms on Google.
If you’re trading single stock futures or Vix futures on a daytime basis, it doesn’t matter, you’ll always have tax obligations to fulfill. Failure to factor in those obligations could significantly hinder your earnings at the end of the day.
Can You Make Money Day Trading Futures?
Sure, you may. But as the rate of success of futures day trading shows, it won’t be easy. Primarily, you need enough starting capital to prevent blowing you out of the game due to initial errors. You will need to have high risk management and a good approach.
You must also be able to spend time and energy in learning and using all of the above-mentioned tools. Do all that and you may well be in the minority that makes beautiful money. This depends on you, completely.