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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. Believe it or not, there are trading ranges that can develop intraday. It's hard for people to think of day trading in terms of ranges because most people assume day trading is some wild man's game with flashing lights bouncing off the screen. I personally could not make money trading ranges.
It's not that ranges don't work; they just didn't work for me. The slowness of the moves and the fact I had to trade with larger sums of money to achieve the same profits made me uneasy. I would close trades well before they had time to develop. You may not have these issues, so review the trading range rules and see if you have found a match for your trading style. At the end of the day around 2 pm the volatility picks up again in the market. This is where traders return from lunch and are looking to enter or close positions in preparation for the next trading day.
This is a great trading opportunity for active traders as the high low ranges set earlier in the day are breached.
Again, I only trade the mornings, largely because I will over trade if given the opportunity, but if you are a volatility trader after 2 pm is when you can get back into the game. A flag is a classic technical analysis pattern that predates anyone reading this article.
If you are unfamiliar with the pattern it's a sloping rectangular formation that occurs after a strong move. The primary characteristics of the formation are an increase in volume with a sharp price move. The stock then begins to consolidate in a range pattern that goes counter to the trend and volume completely dries up. While I do not trade flags, I do like the fact the formation is soundly based on price and volume principles. I trade the Wyckoff method which calls for parallel trend channels and stays away from the head and shoulders patterns, diamond formations, and other complicated chart formations.
However, I would be re-missed if I did not touch on the concept of ascending and descending triangles. Like the flag formation, an ascending or descending triangle will develop after a strong move in a stock. The part of the triangle formation I like the most is that the reactions are smaller and smaller each failed attempt at the breakout level. Funny enough when a trade goes against me, the ascending or descending triangle is the one formation that you can literally feel pulling away at your life.
If you are short, the stock fails at the high of the day, so you immediately feel relieved as the stock backs away. This flash of hope is replaced by fear as the stock quickly turns back up again and does not break the previous low of the day. This process goes on and on, for what feels like ages, and by the time the stock finally breaks out, you already knew you were toast two hours into the formation.
In this article, we covered 6 classic day trading setups. I could have easily highlighted another dozen or so, but that would only expose one of the main problems confronting active traders. Your job is not to trade everything but only trade a limited few. Remember, it only takes mastery of one-day trading setup to make consistent profits in the market. Do you have an idea of what type of day trading setup you should be trading? If not, or if you are looking to refine your current trading methodology, try out our trading simulator built by and for active traders.
Learn to trade in a risk-free environment before placing your hard earned money in the market. Want to practice the information from this article? June 4, at 2: Hi Al — been following and reading your blog for a while. This is a great article that I will absolutely re-tweet. July 14, at 9: Your email address will not be published. Best Moving Average for Day Trading. Free Trial Log In. Interested in Trading Risk-Free?
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