Thinking of dabbling into day trading futures? Before you start, explore the ins and outs of this trading strategy with this article.
Day trading futures involves buying and selling financial contracts within the same trading day.
The financial market constantly undergoes sudden price swings, and the day trading futures fundamentally capitalize on these short-term price fluctuations.
Given the potential for quick profits, the strategy is rapidly getting popular. However, the volatility of the market is another reality, which raises the risk of substantial losses.
In this article, we comprehensively overview day trade futures. We analyze their nuances and mention their advantages and disadvantages – all of which will help appropriately weigh the risks before you venture into day trading futures.
What Are Futures in Trading?
Before we dig deep into how day trade futures work, let’s first understand what futures are.
In trading, futures are financial contracts that obligate a buyer to purchase, or a seller to sell, a specific asset at a predetermined price on a set date.
Common assets dealt as futures include commodities like oil, gold, or agricultural products, as well as stock market indices or currencies.
While futures are often confused with stocks, the two are strikingly different. This implies that, unlike stocks where you buy a share in a company, trading futures does not involve owning the actual assets.
Instead, traders in futures make bets on the expected future price changes (after analyzing the available data) of these assets and then aim to profit from the predicted price movements, without physically buying the assets.
In short, the buyer and seller agree on a future price and date for the transaction, allowing traders to speculate on price fluctuations.
Now the financial impact of the deal depends on whether the actual market price of the asset is higher or lower than the agreed-upon futures price.
If, by the time the contract matures, the market price is higher, the buyer naturally makes a profit (because they get to purchase the asset at a lower price decided in the futures contract).
On the other hand, if the market value of the commodity is lower, it favors the seller as they can sell the asset for more than its current price.
Advantages of Day Trade Futures
Now that you understand futures trading, let’s break down why it has become a go-to for many:
High Liquidity
Liquidity refers to the ease with which an asset can be bought or sold in the market without significantly affecting its price. In more liquid markets, there are more buyers and sellers, which creates a smoother and faster trading environment.
There are four main indicators due to which the trading market is deemed highly liquid:
- High trading volumes
- Narrow difference between the bid and ask
- Low price impact, i.e. individual trades have minimal effect on asset prices
- Low transaction costs
Since liquidity influences the efficiency of transactions, a liquid market naturally reduces the risk of significant price variations during the execution of orders, which offers traders a more predictable and profitable experience.
Diversification
Day trade futures involve allocating capital across different assets, such as commodities and currencies, minimizing the impact of volatility in any single market.
The financial market today is swiftly changing, and amidst this, diversification is a key risk management tool. It shields portfolios from the unpredictable nature of individual assets and enhances the overall risk-to-reward ratio.
It not only mitigates risk but also promotes stability and consistency in returns, making it an essential component for traders seeking adaptability in their day trading strategies.
Intraday Profit Opportunities
Intraday profit opportunities in futures trading arise from the ability to capitalize on short-term price movements within a single trading day. Futures markets, known for their liquidity and volatility, offer traders the chance to exploit these swift fluctuations.
The goal is to enter and exit positions strategically, taking advantage of price changes to generate profits before the market closes.
This allows for quick decision-making and the potential for substantial gains, ultimately making futures trading a great option for those looking to make profits from intraday market movements.
Disadvantages of Day Trading Futures
High risk and potential for substantial losses is a reality of futures trading, and anyone who is considering it should be aware of the possible consequences.
Here are some major disadvantages of futures trading:
High Risk and Volatility
Where high liquidity makes trading futures a lucrative choice, associated high risk and market volatility also pose significant disadvantages.
Trading futures comes with the inherent unpredictability of price movements which amplifies the chances of losses. Rapid price fluctuations can lead to unexpected outcomes, making risk management more challenging.
While high volatility can offer profit opportunities, it also intensifies the likelihood of significant financial setbacks.
Market Timing Challenges
Market timing challenges present a notable drawback in day trading futures. It is understandably difficult to accurately predict the precise moments to enter or exit positions within the fleeting time frame of a single trading day.
The inability to consistently time the market can result in missed opportunities or unexpected losses.
This emphasizes the need to not only plan strategically but also to adapt to the ever-changing landscape of futures trading.
Costs and Fees
People come across hefty fees when starting with futures trading. There are various kinds of charges including commission, exchange fees, and platform charges, which can significantly impact overall profitability.
The costs associated with executing trades, coupled with any additional fees from the trading platform, contribute to the financial burden.
Managing and minimizing these expenses by choosing appropriate platforms and brokers is crucial for day traders, as they directly influence the net returns from trading activities.
Frequently Asked Questions
What is leverage on futures?
In futures trading, when you leverage, you’re essentially borrowing additional funds from your broker to increase the size of your position.
For example, you have $1000, but you want to control a much larger position of $5000. Your broker acts as an intermediary, providing you with the extra $4000 to supplement your initial investment.
The borrowed amount, also called the margin, acts as collateral for the leveraged position.
In other words, if the market moves in the direction you predicted, you can generate higher profits in the larger position. However, if you end up losing money, your losses are magnified because you still need to repay the borrowed funds to your broker.
It is therefore crucial for futures traders to understand the potential consequences of market movements on their leveraged positions.
What is a futures contract?
A futures contract is a financial agreement between two parties where they agree to sell /buy an asset at a set price on a specific future date.
The predetermined price acts as a reference because profits or losses depend on how the actual market price compares to it. It therefore decides the financial impact of the trade.
How do I start day trading futures?
Dealing with futures is risky and you need to go about it very carefully.
Here’s a basic guide to help you start with day trading futures:
- Choose a reliable broker offering access to the futures market as well as a user-friendly trading platform.
- Practice with a demo account to hone your skills before risking real capital.
- Develop a solid trading plan, including risk management strategies.
- Initially, invest only a small amount that you can afford to lose.
- Continuously learn, adapt, and refine your approach based on experience and market conditions.
- Consider seeking advice from experienced traders or financial professionals.
How much does it cost to trade futures?
The cost of trading futures varies among platforms, and it is crucial to understand the fee structure.
Traders typically encounter commission fees, exchange fees, and platform fees, which differ based on the chosen broker.
Other than that, there are two key initial financial considerations as well: the margin minimum and the broker’s minimum.
The margin minimum represents the ongoing funds required to maintain open positions. In other words, it is a percentage of the total trade that traders must have in their account as a security deposit.
Broker’s minimum, on the other hand, is the minimum amount required to open an account with a brokerage firm. It varies among brokers and is essentially a fee for a broker’s trading services.
What is a tick size?
Tick size is the minimum price movement of a futures contract, and represents the smallest increment by which the price can change.
The tick size is predetermined by the financial exchange, and is a crucial aspect of setting price limits, determining profit and loss levels, and overall risk management in trading.
All the information made available here is generally provided to serve as an example only, without obligation and without specific recommendations for action. It does not constitute and cannot replace investment advice. We therefore recommend that you contact your personal financial advisor before making a purchase decision.
