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Futures Day trading

In this swift piece we will go over what has led to the situation where people are attempting to use futures to make a living, as well as breaking down precisely how futures work whilst outlining their pros and cons. The fundamental question of this piece will also be answered, which is; can one really make daily income trading futures for a living?

What Are Futures?

A Brief History of Futures

It is vitally important to first understand the history and origin story of futures before going in-depth with them.

Futures contrasts specifically are some of the oldest derivatives contracts that are known. Futures were created due to farmers needing to adapt to the changes in pricing when purchasing their crops and between harvesting and planting their stock. This is the precise reason why so many futures that are being traded in the modern day still take the form of cattle as well as farming food and grains.

Despite its humble beginnings, the futures market has taken on a new and higher-level form. They now incorporate contracts for a variety of offered assets. For example, gold, aluminum and even stocks.

Financial Derivatives

Futures as a concept are pretty simple to actually understand despite seeming confusing and daunting at first glance.

A derivative, for example, is when an instrument bases its value upon whatever the price movements of another instrument is at the time. To use an example, the value of a select derivative when linked to S&P 500 is always in accordance to whatever the price fluctuations are of S&P 500.

In its essence S&P 500 is somewhat of an index for money. The futures contract that will fluctuate in value depending on the time and scenarios surrounding it, similarly to how stocks perform.

Leverage

Leverage is one of the most vital factors to consider when you enter the business of trading futures. This at its core essentially means that will pay a simple up-front payment which will be a percentage of the entirety of the contract. This first margin will be based upon whatever the requirements of that margin were of the asset you are looking to trade.

Variety

Each future has a different factor from another, and as the trader of these futures, it is up to you to know what the differences are. Day trading futures in comparison to stocks has a simple difference, as you are not purchasing shares of anything but simply trading a contract that you have acquired.

In a scenario where the contract size for gold futures is 50 troy ounces, a single contract of aluminum futures would end up in you as the trader taking ownership of 50 troy ounces. If the price of the aluminium you purchased them increase by $3 you would go on to see a profit of $150 as $3 x 50 troy ounces = $150

Terminology

There are several terms that as a trader, you should become accustomed to seeing and hearing, which are the following:

First Notice Day

A futures trading first notice day (FND) will be something that will crop up the day after you as a trade and investor in futures has bought some futures contracts, this will result in you potentially being required to take on physical delivery of whatever the contract’s commodity is. This First Notice Day will contrast amongst differing futures depending on the exchanges and rules in place at the time of purchase.

Last Trading Day

On the last trading day of futures, this is the final day that any potential futures contracts can be traded or closed before being sent out for delivery of the underlying asset of the contract. In the majority of cases, futures almost always come to the conclusion of a cash settlement rather than delivering the physical requirement.

When trading you will always have to consider the unpredictable nature of prices also.

Best Markets for Day Trading Futures

It will always be important to consider your options. For many people, E-mini S&P 500 is the main go-to point when it comes to best markets for day trading futures. Futures here are electronically traded, which creates a nature of constant and instantaneous trading.

It is once again vital to realise that before you lay everything down, to know and be aware that every market is unique and has its own traits, so in-depth consideration and analysis on your behalf is needed to ensure that you get the best experience possible.

Why Trade Futures?

Here are some of the best reasons why futures should obtain your attention over other assets:

1. Low Cost

If you were to try begin in the stock market, it will require you to begin with a pretty hefty start-up capital, however if you begin with futures, this stressful beginning is not a requirement.

The most game changing component, however, is that if you began with $5,000, you do not even have to try and adhere to maintaining that amount consistently. All you need to do is ensure that you are covering the margin. A margin is often in between 3-9% of whatever the full value of the contract you have committed to is. So, at its core, to start up you would only need a few hundred dollars to get going.

2. Futures Shift With The Underlying Asset

You should always analyse in-depth the whatever the underlying asset is but trade the option of the future. Your profit and loss in money will always fluctuate and rely on however the option price moves at any given point in time. Futures always move with the underlying asset.

3. FINRA’s Pattern Day Trading Rule Does NOT Apply

Granted that you are meeting the minimum requirements, which include ensuring that you are using a margin account, as well as trading the same security in excess of four times within a period of five days, you are required to maintain at least $25,000 in your account at any given time.

Although, if you are a day trader, you need margin and leverage to have the potential to profit from intraday swings when trading. However, if you are a trader who is day trading with futures, this rule will not apply to you whatsoever. This whole situation ensures that thousands who usually would not be able to meet strict requirements and guidelines set up by the FINRA are now able to access the markets for themselves.

4. Zero Restrictions On Short-Selling

If you are only but a short-term trader, you need to ensure that you are achieving the best trades only. You have the potential to react to the current market analysis at any given point in time due to the lack of restrictions that are placed on traders in long and short positions in the market.

However, when trading via the stock market, this is not the case. You, as the trader, are placed within a confinement of whatever your brokerage has on offer to you. You will also have to take a loan of some stocks before you even have the option to try and make a profit. Financial regulators of these brokerages also place strict guidelines in place to stop short-selling, this is to prevent the event of a stock market collapse.

5. Reliable Volume Data

You are able to gain from the use of reliable volume data, as there is a lack of central clearing. If you are attempting to obtain reliable volume data from a forex, then good luck, as it is impossible due to forex trading being decentralised. With futures, though, you can witness for yourself who is interested, which allows for accurate analysis.

Cons

Despite all the reasons and benefits when it comes to trading futures, there are two major cons that are on the table when it comes to it, which are the following:

1. Fees

Too many marginal trades can very swiftly stack upon one and other, adding up to a significantly high amount of commission fees through overtrading. So, yes, you may see your ‘successful’ trade, but you may have potentially paid a high price for it as a result.

2. Low Capital

The psychology of trading is something that is vital to consider on the path to becoming a successful trader. The psychological pressures that amount on the path to a higher capital are something that every successful trader either rises to or falls short of.

How To Start Day Trading Futures

If you are a beginner when it comes to day trading futures, then there is no time like the present. Modern day technological innovations have made sure that all the tools and resources needed to do this has become easier to access than ever before.

Minimum Capital Requirement

Day trading futures is one of most simple markets to get started with, as you need less capital than if you were to get started in trading with stocks as an example. Despite the fact that there is no official legally enforced capital requirements, it will still all depend on which broker you get started with.

E-mini futures for example have some of the lowest possible trading margins available on the market. You can find brokers offering futures for just $500.

Choosing A Broker

When choosing a broker that suits you, it will show to be one of the most vital investments you will make on your trading journey. So, what should you be on the lookout for when it comes to choosing a broker?

  • Fees – If you plan on becoming a consistent trader, you will begin to see that commission fees will start to stack upon each other, so it is vitally important to ensure that commissions fees do not start to devour your profits.
  • Customer support – If you are having issues that need a swift fixing it is so important to know beforehand what brokers offer the best and most consistently on-point customer service amongst a variety of different forms of communication.
  • Trading software – It is important to also scope out how good the platform is. Does it offer you all the necessary tools you will need to reach your best potential? Do they require payment for any potentially additional features that you may require? Is the platform easy and simple to navigate across? These are all questions you need to ask yourself.

Picking A Future

To begin once you have gotten started and made your account, the next step is to choose a futures contract. There are a number of key factors to consider when choosing your futures contract, although.

Volume

It is worth seeking out contracts that would often trade in excess of 300,000 per day. This ensures that you know what levels there are, and that there will always be an option readily available for you to buy and sell from and to.

If you have gone and found a contract with a high quantity of volume, then the next step is to look into margins and movements that you feel will identify well with what you feel your trading style is.

The margin deals that your brokerage of choice offers to you is what will decide how much starting capital you will have to have to enter into a position.

Movement

Next up to consider is movement. You are able to establish movement by considering two factors which are the following: whatever the point value and the estimation of how many points your future contract will move throughout up and down throughout a general day. This is what will assist you when you decide to try and enter a position.

To go on to find the range to enter a position, the only steps that you need to take is to take a look at the difference between the highest and lowest prices on the present day of your trading.

  • True high – Today’s high or yesterday’s high.
  • True low – Today’s low or yesterday’s low.
  • True range – Whatever the true high is subtracting the true low.

Once you have gone on to obtain all this data, the true range has been revealed through your findings and now that you’ve found whatever the true high and low is, you can follow the following: If the bond were to close on any given day at 90, then if gaps were to eventually open at a higher number of 91, and during that day reaches a high of 92, then the true range would eventually go on to reveal itself to be the following conclusion:

  • True high – 92
  • True low – 90
  • True range – 92 – 90

Using These Factors

What should you decide to move for one you have a complete understanding when it comes to comparing the volume, volatility and movement in future contracts?

E-Mini S&P 500 futures are a fantastic beginning area for any new intraday trader at any given point in time to start with. Through this, you are able to obtain margins at $500.

As for another worthwhile considering, crude oil is pretty high up. It does require a high margin, but despite this you can go on to achieve the most volatility to pounce upon. When searching for the most astronomical profits in the trading world, many have sought riches, and many have found them in the world of oil. Although you must take into consideration the constant flipping of prices that may put you at risk of making enormous losses.

Strategies

All of the following points below are relevant when it comes to trading strategies that you can incorporate into your everyday trading life.

Analysis

To ensure that you reach your maximum potential in the market, you will soon realise that strategies are a necessity. Charts and patterns are great ways to help you determine whatever the future pricing movements could be down the line.

The analysis that you conduct is going to be a vital tool that will brighten the path in helping you realise what factors of trading best impact your instrument. Worldly events are vital in deciding the outcome of trades.

When it comes to features, you’ll have to consider other factors such as the weather and crop yields at any given time in the year.

Risk & Examples

Below is an example of a strategy that has been tested and yielded positive results in risk-taking.

Example

If you were to have 8,000 in your account, all the while trying to aim for a 55%-win ratio. You surely want to risk as little as 1% of your total amount. To deploy this tactic, you need to set up a stop-loss. You would then go on to deploy that stop-loss five ticks from whatever your entry price is, all whilst deploying another at a headlight nine ticks away.

Your risk on the trade you have would potentially be five ticks x $13.50 which would equate to $67.50, which is significantly smaller than your $80 maximum risk amount, or 1% risk amount of your total.

Scalping

One of the other alternative strategies is scalping. This strategies gig is to restrict any potential losses to one or two ticks whilst retrieving any potential profits as soon as they become available. However, scalping is a technique that does demand a high amount of trades. The key to a success in trading futures at its core is to remain patient and buy your time into discovering the best strategy to suit your style.

Tips

Here is a collection of tips and tricks that you can take into account when starting out as a futures trader:

  • Always have a plan – You will have to ensure that you are prepared for the outcomes. If you do things randomly and on a whim, you will very quickly begin to panic and lose money.
  • Retain discipline – Always retain a level of self-control, so many people fail at a lack of emotional control. Do not give into any potential fears or greed that you may feel overwhelming you.
  • Be wary of margin – Keep the risk lose and the margins at a minimum and you should never find yourself in a scenario where you are oozing money.
  • Practice first – Practice makes perfect. Many brokers offer demo accounts that allow you to test your techniques and practice your skills before getting started, utilise them!
  • News – Keep up to date on daily events via the news. Business Insider for example is a great way to keep up-to-date on daily events that may impact your trading exploits.

Education

The market is an ever-changing entity, which means you as the trader need to constantly adapt and educate yourself to change along with the market. Here are some ways to consistently educate yourself:

  • Read Books – Use some of the most innovative strategies from the best traders on the planet to improve upon your own work.
  • Read Blogs – This is vital to stay in constant flow of new news and trends.
  • Read and Attend Courses/tutorials – Through this you will obtain advice on indicators that will assist you for your chart setup.
  • Watch Videos – This will allow you to witness the experts in action to try and apply their tips to your own work.
  • Visit Trading rooms – These rooms are a fantastic source of information and education.

Taxes

Regardless of your scenario, you will always have tax measures that need tending to. If you decide to not adhere to these tax responsibilities, you could end up with a massive loss at the end of the line.

Can You Make Money Day Trading Futures?

Of course! You must ensure that you have enough starting capital to let your rookie mistakes blow you out of the water. You also need to adapt your mentality to become strong in the eyes of risk.

You will also have to be willing to invest the time into making the most of the resources that are at your fingertips. The amount of profits you earn will ultimately be down to you and the time you are willing to put into all of this.

Billy Houghton

Billy Houghton is a top acclaimed and sought-after commodities futures trading expert. The expertise and in-depth level of analysis that is offered by Billy Houghton is what has managed to put him at the stage of being the top ranked author for MetaNews among multiple different categories. Throughout his career, Billy has specifically spent over three decades on Wall Street fine-tuning his skills, which included over two decades at a trading desk. In more recent times, specifically the last decade, Billy has been researching algorithms of AI in futures trading, and believes they are the future of trading.
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