A Beginner's Guide to Futures Day Trading

(A 20 min read)

CONTENT

Intro

Futures Contracts 101: Understanding the Basics

A Brief History of Futures Trading

How Futures Trading Works

Key Differences Between Futures and Other Forms of Trading

Benefit of Futures

Top Day Trading Strategies for Futures Markets

Common Mistakes That Beginner Futures Day Traders Make And How To Avoid Them

Risk Management 101: Importance of Setting Stop-Loss Orders

Managing Emotions While Day Trading Futures

Choosing a Futures Broker

Key Features To Look For In A Futures Trading Platform

Conclusion

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1. INTRO

In this article, I am going to go over everything you need to know about day trading Futures and WHY futures is the BEST instrument for day trading especially for beginners!

Futures trading can seem intimidating, but it can also be an exciting and potentially lucrative way to make a living (or just make some extra cash on the side).

So, what is futures day trading anyway? Well, let me break it down for you. Futures trading is a type of financial trading where you buy and sell contracts that allow you to purchase or sell a certain commodity, currency, or stock index at a specific price and at a specific time in the future. The idea behind day trading futures is to make profits by taking advantage of short-term price movements, typically within the same trading day.

Now, you may be thinking, "But wait, why would I want to trade futures when I could just trade forex, or stocks?" Well, my curious friend, there are a few reasons why futures may be a better option for day trading. For starters, futures trading allows you to use leverage, which means you can control a larger amount of a financial instrument with a smaller amount of capital. That's like being able to buy a whole pizza with just a few bucks! Okay, maybe not quite like that, but you get the idea.

Another reason futures can be better for day trading is their high liquidity. This means there's a lot of buying and selling activity going on, which can make it easier to enter and exit positions quickly and at competitive prices. And let's not forget about the volatility. Futures markets can be highly volatile, which means there can be some pretty significant price movements within a short period of time. That means more potential profit for you!

But, before you go diving headfirst into the futures markets, there are a few things you should know. Futures trading is not for the faint of heart. It requires a solid understanding of the markets, risk management strategies, and technical analysis. And let's be real, sometimes even the most experienced traders get it wrong. That's why it's important for beginners to approach futures trading with caution and to seek out education and guidance from experienced traders or trading coaches.

In the rest of this article, we'll cover everything from futures contracts to day trading strategies to risk management. So, grab a cup of coffee (or a glass of wine, no judgment here) and let's dive in!

2. Futures Contracts 101: Understanding the Basics

Alright, so now that we've covered the basics of futures day trading, let's talk about futures contracts. A futures contract is an agreement between a buyer and a seller to purchase or sell a certain financial instrument at a specific price and at a specific time in the future. This means that when you buy a futures contract, you're agreeing to buy the underlying financial instrument at a future date, and when you sell a futures contract, you're agreeing to sell the underlying financial instrument at a future date.

Now, futures contracts come in all shapes and sizes. You can trade futures on commodities like gold, oil, and wheat, or on financial instruments like currencies, bonds, and stock indices. Each futures contract is unique and has its own specifications, including the underlying financial instrument, the contract size, the expiration date, and the tick size.

Let's break down each of these specifications a bit more:

• Underlying Financial Instrument: This is the asset that the futures contract is based on. For example, a gold futures contract is based on the price of gold.
• Contract Size: This is the amount of the underlying financial instrument that the futures contract represents. For example, one gold futures contract may represent 100 troy ounces of gold.
• Expiration Date: This is the date on which the futures contract expires. After this date, the contract is no longer valid.
• Tick Size: This is the minimum price movement for the futures contract. For example, if the tick size for a gold futures contract is $0.10, then the price can move in increments of $0.10.

So, how do you actually trade futures contracts? Well, it's not as complicated as it may seem. You can trade futures contracts through a futures exchange, such as the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE). These exchanges provide a platform for buyers and sellers to trade futures contracts, and they also provide information on futures prices, contract specifications, and trading hours.

When you trade futures contracts, you'll need to open a futures trading account with a broker. Your broker will provide you with access to the futures markets and will execute your trades on your behalf. It's important to choose a reputable broker who offers competitive pricing and good customer service. (More details on brokers later on in the article)

One important thing to keep in mind when trading futures contracts is the concept of margin. Margin is the amount of money you need to have in your account to hold a futures position. Futures trading allows for leverage, which means you can control a larger amount of the underlying financial instrument with a smaller amount of capital. However, leverage also means that losses can be amplified, so it's important to use proper risk management strategies when trading futures.

Before we dive into some popular day trading strategies, let’s touch base on the history of futures trading so you fully understand futures trading.

3. A Brief History of Futures Trading

Have you ever wondered how people in the past managed to predict the future prices of commodities like gold or wheat? Well, wonder no more! The answer lies in the world of futures trading.

Futures trading dates back to the 17th century when Japanese rice farmers started selling contracts to deliver rice at a future date. This helped them protect themselves from price fluctuations and ensured they received a fair price for their crops.

Since then, futures trading has evolved into a global marketplace where traders buy and sell contracts for commodities, currencies, and financial instruments. It's like a crystal ball that lets you predict the future price movements of an asset without actually owning it.

4. How Futures Trading Works

So, how does futures trading work? Essentially, a futures contract is an agreement between two parties to buy or sell an asset at a future date for a predetermined price. For example, if you think the price of gold is going to go up, you can buy a futures contract for a specific amount of gold at a certain price.

The value of the futures contract changes as the price of the underlying asset changes. If the price of gold goes up, the value of your futures contract goes up, and you can sell it for a profit. If the price of gold goes down, the value of your futures contract goes down, and you may end up losing money.

5. Key Differences Between Futures And Other Forms of Trading

Now, here's where things get interesting. Day trading futures is a bit like playing a game of hot potato, but with money. You buy and sell futures contracts all within the same trading day, trying to make a profit from the price movements of the underlying asset.

The key difference between day trading futures and other forms of trading, like stocks or options, is the high level of leverage involved. With futures trading, you can control a large amount of an asset with just a small amount of capital. This means you can potentially make a lot of money, but you can also lose a lot of money.

Here are some detail break down comparisons.

The problems with stocks when it comes to trading:

• You need BIG capital to participate
• It is usually better suited for SWING trading
• Its mostly used as a buy low, and sell high. And not everybody is capable of selling shorts or betting that the market is gonna go down
• It has limitations and requires a huge amount of financial backing in order to make significant progress with it.

Currencies/Forex, on the other hand is the MOST used and tradable:

However,

• It’s not regulated for spot trading. So you can easily open an account with a $150 bucks and get started
• The main problem with Forex is the “time sequence”
• The “time sequence” here means what are the best suited times to trade this type of instrument?
• The stock opens at 9:30AM and onwards, but the Forex is open 24/7 and is mostly driven by the bank transactions.
• Forex is actually created specifically for the banks, and that’s where the majority of the movement will happen
• And the banks open at 8:30AM, the overnight sessions happen respectively on the Sydney, Tokyo, UK, etc.
• So because of the various time sequence, it has a lot of variables of what actually moves the market, making it more difficult to dictate how the market is going to react.
• On top of that, every opening of the respective time zone could bring instability to the currency market, and will make it very hard to predict.
• So you definitely have to do more due diligence to be able to successfully trade it.

OPTIONS, on the other hand, are way more complex, although it can be extremely profitable if you know what to look for. However, the level of complexity of understanding options is very high. But the upside is you can start with low capital and be extremely profitable! On top of that, the risk amount is only the amount that you have invested in that position, that’s it!

What is important to note about these underlying instruments is the “Pattern Day Trader” rule.

The pattern day trading rule or PDT is a regulatory requirement that applies to certain individual investors in the United States who trade frequently on margin. The rule is designed to protect investors from excessive risk-taking and to prevent the manipulation of certain securities.

Under the PDT rule, if an individual trader makes four or more day trades (defined as buying and selling a security within the same trading day) within a five-day period using a margin account, they will be classified as a pattern day trader. This classification comes with certain restrictions and requirements, including:

• Minimum account balance: PDT traders must maintain a minimum account balance of $25,000. This is to ensure that they have sufficient funds to cover the risk of their trades.
• Margin requirements: Pattern day traders must adhere to higher margin requirements when trading on margin. This means they must maintain a minimum amount of equity in their account at all times to cover potential losses.
• Restrictions on buying power: Pattern day traders are limited in the amount of buying power they can use when making trades. This is to prevent them from taking on excessive risk.

It's important to note that the PDT rule is a regulatory requirement, and not all individual investors are subject to it. The rule only applies to those who trade frequently on margin and meet the criteria for a pattern day trader.

This brings us to one of the main benefits of trading Futures.

The PDT rule applies to all stock and options trading in the United States. It DOES NOT apply to futures or other financial instruments.

6. The Benefit Of Futures

• It brings a centralized process.
• It has very clear views of when it starts even though it also opens 24/7 like Forex
• It also gives you the flexibility of leverage.
• You can be fully directional which means you can trade on the way up and you can trade on the way down.

But the caveat is you DO NOT need huge amount of capital to do that (referring to the Pattern Day Trader rule), and that is a big benefit that attracts a lot professional money managers into the futures, and in addition they become liquid.

Trading futures can be an efficient and relatively simple way to seek profits or reduce risk in the market.

Specifically to the Index Futures:

Index futures contract is a legally binding agreement between buyer and seller. It allows traders to buy or sell a contract on a financial index and settle it at a future date. In our case, the future date means the SAME day - we are liquid, we buy and sell within seconds, minute, hours, etc..

And here’s the big advantage, it doesn’t matter how many transaction we take throughout the session, at the END of the closing bell , it will be settled for cash and we’re done. That’s the power of the futures market. This is the reason why big fund managers move into the futures market.

In addition, here are the TOP 5 Reasons why you should trade futures for day trading.

1. Leverage

Futures provide incredible leverage meaning you can control a large amount of contract value with a relatively small amount of capital and use less money to gain exposure to price movements in the markets.

2. Volatility

Futures markets can be highly volatile, which can present opportunities for day traders to capitalize on price movements.

3. Liquidity

Futures markets are generally quite liquid, which means that it is easy to buy and sell futures contracts. This can be especially beneficial for day traders, who need to be able to enter and exit positions quickly.

4. Diversification

Day trading futures can offer the opportunity to diversify a portfolio by trading a wide range of underlying assets, including commodities, currencies, and financial instruments.

5. Short Selling

Day trading futures also allows traders to take short positions, which means selling a contract that they do not currently own in the hope of buying it back at a lower price in the future. This can be a useful strategy for traders who believe that the price of an asset will decline.

Now that we have covered the fundamentals, in the next section, we'll talk about some popular day trading strategies for futures markets. Get ready to make some dough!

7. Top Day Trading Strategies for Futures Markets

Alright, let's get into the nitty-gritty of futures day trading. While there are countless day trading strategies out there, we're going to focus on a few popular ones that work well in futures markets. Get ready to take some notes and make some money.

Scalping: This is a popular strategy among day traders in which they aim to profit off of small price movements in the market. Scalpers typically hold positions for just a few seconds or minutes and aim to make a small profit on each trade. Think of it like being a mosquito and taking little sips of blood from the market.

Trend following: This strategy involves identifying the direction of the market trend and then taking trades in the same direction. For example, if the market is in an uptrend, you would look to buy futures contracts, and if the market is in a downtrend, you would look to sell futures contracts. It's like surfing the waves of the market, dude.

Breakout trading: This strategy involves identifying key levels of support and resistance and then taking trades when the market breaks through these levels. Breakout traders typically look for high volatility and high trading volume to confirm a breakout. It's like catching a big fish in a small pond.

News trading: This strategy involves trading based on news events and economic releases. Traders will analyze the news and try to predict how the market will react. This strategy can be risky because markets can be unpredictable, but it can also be very profitable if you're on the right side of the trade. It's like gambling on a horse race, but with a little more strategy involved.

Now, keep in mind that there is no one-size-fits-all strategy when it comes to day trading futures. Each trader has their own unique approach and trading style. It's important to do your own research and testing to find a strategy that works best for you and your risk tolerance.

In the next section, we'll talk about some common mistakes that beginner futures day traders make and how to avoid them.

8. Common Mistakes That Beginner Futures Day Traders Make and How to Avoid Them.

First up, don't be too confident. Just because you've made a few good trades doesn't mean you're invincible. Keep your ego in check and don't take unnecessary risks. That's a recipe for disaster.

Another big mistake is not having a plan. You can't just go into trading blindly and hope for the best. You need a strategy. Figure out what your goals are and how you're going to achieve them. And stick to it!

Now, here's one that might sound obvious, but you'd be surprised how many people make this mistake: don't trade with money you can't afford to lose. If you're betting your life savings on a single trade, you're asking for trouble. Only trade with money you can afford to lose without it ruining your life.

Oh, and don't forget about your emotions. They can be your worst enemy. Don't let fear or greed take over. Stay calm and rational. And if you find yourself getting too emotional, take a break. Go for a walk. Pet a dog. Do something to calm down.

Last but not least, don't underestimate the importance of education. You can't just wing it and hope for the best. Learn as much as you can about futures day trading. Read books, watch videos, take courses. The more you know, the better off you'll be.

In conclusion, if you're a beginner futures day trader, don't make these common mistakes. Stay humble, have a plan, don't trade with money you can't afford to lose, keep your emotions in check, and educate yourself. And remember, futures day trading isn't for everyone. If it's not working out, it's okay to walk away. There are plenty of other ways to make money out there.

9. Risk Management 101: Importance of Setting Stop-Loss Orders

Setting stop-loss orders is an essential aspect of managing risk in futures trading. A stop-loss order is a type of order that you can place with your broker to automatically sell your position if it reaches a certain price point. The purpose of a stop-loss order is to limit your potential losses by closing out your position at a predetermined price.

When setting a stop-loss order, it's important to consider a few factors. First, you need to determine the appropriate price point at which to set your stop-loss. This price should be based on your analysis of the market and your trading strategy. For example, if you're trading a futures contract with high volatility, you may want to set a wider stop-loss to account for potential price swings.

Second, you need to choose the type of stop-loss order that you want to use. There are several different types of stop-loss orders, including a market order, a limit order, and a trailing stop order. Each type of order has its own advantages and disadvantages, so it's important to understand how each works before deciding which one to use.

A market order is the most straightforward type of stop-loss order. With a market order, your position will be automatically sold at the current market price once your stop-loss price is reached. The advantage of a market order is that it guarantees that your position will be closed out, but the disadvantage is that you may not get the best price if the market is moving quickly.

A limit order, on the other hand, allows you to specify the price at which you want to sell your position. This means that you can potentially get a better price than with a market order, but there's no guarantee that your position will be sold if the market doesn't reach your specified price.

Finally, a trailing stop order is a more advanced type of stop-loss order that allows you to set a dynamic stop-loss that will move with the market. With a trailing stop, your stop-loss price will move up or down as the market price moves in your favor. This can be useful for capturing profits while still limiting your potential losses.

Overall, setting stop-loss orders is an important part of managing risk in futures trading. By carefully selecting your stop-loss price and the type of order that you want to use, you can limit your potential losses while still taking advantage of market opportunities. Just remember to always do your research and understand the risks involved before placing any trades.

10. Managing Emotions While Day Trading Futures

Managing emotions while day trading futures is critical to success. The markets can be extremely volatile, and it's easy to get caught up in the excitement, fear, and greed that come with trading. To minimize the negative impact of emotions on your trading, you need to develop a strategy that focuses on controlling your emotions.

Here are some tips for managing emotions while day trading futures:

1. Develop a trading plan: Having a well-defined trading plan can help reduce emotional reactions to market fluctuations. A trading plan should outline your trading strategy, entry and exit points, risk management strategies, and profit targets. Stick to your plan, and don't let emotions guide your decisions.
2. Use stop-loss orders: Stop-loss orders can help limit losses by automatically closing a position when the price reaches a predetermined level. This can help you avoid emotional decisions that could lead to larger losses.
3. Practice risk management: Successful day traders understand the importance of managing risk. Determine your risk tolerance and set stop-loss orders accordingly. Don't risk more than you can afford to lose, and avoid chasing losses by increasing your position size.
4. Manage your expectations: Day trading futures is not a get-rich-quick scheme. It takes time, effort, and discipline to succeed. Don't expect to make a profit every day, and don't let losses discourage you.
5. Stay focused: Day trading can be mentally exhausting, and it's easy to get distracted by outside factors. Stay focused on the markets, and avoid checking social media or other distractions while trading.
6. Take breaks: It's important to take breaks during the trading day to rest and recharge. Avoid overtrading, and don't let the stress of the markets consume you.
7. Keep a trading journal: Keeping a trading journal can help you track your emotions and identify patterns in your trading behavior. Review your journal regularly, and use it to make adjustments to your trading plan.

In summary, managing emotions while day trading futures requires discipline, patience, and a well-defined trading plan. Traders should focus on managing risk, staying focused, and avoiding emotional reactions to market fluctuations. By following these tips, you can increase your chances of success and reduce the impact of emotions on your trading performance.

11. Choosing a Futures Broker

Here are some factors to consider when choosing a futures broker:

1. Reputation: Look for a broker with a solid reputation in the industry. Check online reviews, industry publications, and talk to other traders to get an idea of the broker's track record.
2. Regulation: Ensure that the broker is registered with the regulatory body in your country. This can provide some protection for your investments and ensure that the broker operates within legal boundaries.
3. Trading Platform: The trading platform is a crucial component of a futures broker's service. Check that the platform is reliable, user-friendly, and offers the tools and features you need to trade effectively.
4. Commission and Fees: Futures brokers typically charge a commission or fee for their services. Compare the fees charged by different brokers and look for one that offers competitive rates.
5. Customer Service: Look for a broker that provides responsive and knowledgeable customer service. You want to be able to get help when you need it, whether it's with technical issues, account management, or trading advice.
6. Educational Resources: A good futures broker will offer educational resources to help traders improve their skills and knowledge. Look for a broker that offers webinars, tutorials, and other resources that can help you learn and grow as a trader.
7. Asset Offerings: Check the broker's asset offerings and ensure that they offer the futures contracts you're interested in trading. Some brokers may offer a wider range of assets than others.
8. Account Minimums: Some futures brokers require a minimum deposit to open an account. Check the account minimums and ensure that they fit within your budget.
9. Technology: Make sure the broker has the technology to support your trading style. This includes things like fast order execution, real-time data, and advanced charting tools.

In summary, choosing a futures broker requires careful consideration of several factors. Look for a broker with a solid reputation, good regulation, a reliable trading platform, competitive fees, responsive customer service, educational resources, the assets you want to trade, account minimums that fit your budget, and technology that supports your trading style. With these factors in mind, you can find a futures broker that meets your needs and helps you succeed as a trader.

12. Key Features To Look For In A Futures Trading Platform

Here are some key features to look for in a futures trading platform:

1. User-Friendly Interface: A futures trading platform should be easy to navigate and use. Look for a platform that has an intuitive interface, clear charts, and customizable settings.
2. Real-Time Data: Real-time data is essential for effective futures trading. Make sure the platform provides real-time market data, including prices, volumes, and order book depth.
3. Advanced Charting Tools: Advanced charting tools are important for technical analysis. Look for a platform that provides a range of charting tools, including candlestick charts, indicators, and drawing tools.
4. Order Types: A futures trading platform should offer a range of order types, including market orders, limit orders, stop-loss orders, and trailing stops. This allows traders to execute trades in a variety of market conditions and manage their risk effectively.
5. Customizable Alerts: Customizable alerts allow traders to receive notifications when certain market conditions are met. This can help traders stay informed and make timely trading decisions.
6. Trading Simulator: A trading simulator is a tool that allows traders to practice trading in a simulated environment without risking real money. Look for a platform that offers a trading simulator to help you hone your skills and test trading strategies.
7. Automated Trading: Some futures trading platforms offer automated trading capabilities, allowing traders to create and test trading algorithms. This can be a valuable tool for more experienced traders who want to automate their trading strategies.
8. Mobile App: A mobile app can be a useful feature for traders who need to access the market on the go. Look for a platform that offers a mobile app that provides real-time data, order execution, and other features.
9. Security: Finally, security is a crucial feature to look for in a futures trading platform. Make sure the platform is secure, with robust data encryption, two-factor authentication, and other security features to protect your account and personal information.

In summary, when choosing a futures trading platform, look for a user-friendly interface, real-time data, advanced charting tools, a range of order types, customizable alerts, a trading simulator, automated trading capabilities, a mobile app, and robust security features. These features can help you make informed trading decisions and manage your risk effectively in the futures market.

13. CONCLUSION

In conclusion, futures day trading can be a rewarding and exciting activity for those who are willing to put in the time and effort to learn the ropes. By understanding the fundamentals of futures trading, developing a sound trading strategy, and using the right tools and resources, beginner traders can start trading futures with confidence.

To get started with futures day trading, it's important to choose a reputable futures broker that offers a user-friendly trading platform and access to real-time market data. From there, you can start learning about technical and fundamental analysis, develop a trading plan that fits your goals and risk tolerance, and start practicing with a demo account or paper trading.

As with any type of trading, it's important to manage your risk and avoid emotional decision-making. Stick to your trading plan, use stop-loss orders, and practice good money management to minimize your losses and maximize your profits.

While futures day trading can be challenging, with dedication and persistence, it's possible to become a successful futures trader. By following the tips and strategies outlined in this guide, beginner traders can take the first steps towards achieving their trading goals and building a profitable futures trading career.

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