Day trading futures is not for the faint of heart.
Many a fortune has disappeared in the fast-paced world of futures trading. Leverage is big and so are contract sizes. There is little room for error.
Did you know that the average trader wades into this dangerous world unprepared?
They have little knowledge and less training, yet they start anyway. With so much money on the line, you would expect traders to hit the books for years before jumping in.
Yet for most aspiring traders, the reality is they get fooled by the seeming simplicity. Learning how to press a buy or sell button to generate the potential for profit is easy. This ease is too alluring.
So in this article, I want to share with you 5 important truths about day trading futures. These will remove some of the dangers and prepare you for the minefield of futures trading.
Day Trading Futures Truth #1: There is real danger in this market for the beginner
Have you ever seen a sports car driven by someone who would fail a driver’s test?
It’s an accident waiting to happen. And the severity of the crash heightened by the high-performance vehicle.
Fast cars, sharp knives, and futures contracts are all tools that benefit the capable.
The leverage that a trader can get in the futures market is huge. For the professional, this is an asset. For the untrained, it’s a massive liability.
So what can you do to protect yourself?
A simple solution is to have an effective trading plan and lots of practice. There is an incredible advantage to knowing what you are doing when the stakes are high.
There’s nothing wrong with leverage. There is everything wrong with using leverage without planning and practice.
Make sure you are ready with a solid plan and lots of practice under your belt before you trade futures. You’ll stay safer, and have a better chance of making it a lucrative long term career.
Day Trading Futures Truth #2: Understand future contracts
One of the most annoying things that anyone has to do in life is pay interest.
Unfortunately, interest works its way into futures trading too.
A future gets its name because it’s a contract based on something that is going to happen in the future. Whoever is buying and holding the contract pays an implied (or build in) interest payment. Whoever is selling the contract receives the payment.
“Keep your futures contract hold times short to reduce interest costs.”
How can you reduce the impact of interest payments on your futures trading?
There are two excellent ways:
1. Keep your position hold times short in duration.
2. Trade both long and short to balance out payment vs. receipt of interest.
Interest in futures trading is no fun to pay, but it’s part of the game. Make sure you follow methods to reduce it when possible. And ensure that your plan factors in the effect interest will have on your trading.
Day Trading Futures Truth #3: Variety through velocity
A list of all the futures contracts traded in the USA can fit on a medium desktop screen. All the high volume ones can fit on a mobile phone screen.
In contrast, thousands of different stocks trade every day.
There isn’t anywhere near as much variety in the world of futures trading.
Day traders of stocks can vary their opportunities through variety. They can do this by applying the same strategy to a large basket of different stocks that they trade.
What can a futures trader who wants variety do?
A simple solution is to create variety by increasing the number of strategies and setups. This opens up more trading opportunities in the same futures contract.
For example, a futures trader could have two strategies to trade the e-mini. One for when the market is trending and one for when it is consolidating. This way, the frequency that they trade goes up, even though they are only trading the e-mini.
If you want more variety as a futures trader, focus on creating more strategies. With more strategies you will have more trade opportunities. And this means you won’t need the market variety of stocks.
Day Trading Futures Truth #4: Compelling commissions
Commissions. No trader likes to pay them.
They affect your bottom line. Depending on your strategy they can have a huge impact on profits.
Although the burden has lessened quite a bit since decades past, they are still a very real cost for all traders.
But here is some great news for futures traders… low commissions is an area where futures excel.
“Commissions add up. They add up less in the futures market.”
The low commissions in futures relative to other markets are a big draw.
To understand how they compare, take this example:
Consider taking a position in the S&P500. One ES futures contract will get you $100,000 worth of exposure. The buy and sell commissions for this exposure could be as little as $3 or $6 each total.
Now compare that to using the SPY ETF shares. A stock trader would need 500 shares to get the same $100,000 exposure. The buy and sell commissions would be roughly $10 each or $20 total. Even pros who pay 1 penny per share commissions would be paying $5 each side or $10 total.
So as far as commissions go, futures traders have the upper hand over stock traders. If commissions have a big impact your strategy consider the futures benefit. It could save you a lot of money over the long run.
Day Trading Futures Truth #5: Discipline for dollars
The importance of discipline in trading is so common it’s a cliché. Yet it’s still so essential to success.
Futures is a high-risk environment. This makes discipline even more relevant to succeeding than in other markets.
Anyone who trades or is considering trading futures should make discipline top priority.
Jim Paul wrote an excellent book called “What I Learned Losing A Million Dollars.” He says that most traders fall into one of two broad categories.
The two categories are:
- There is something wrong with their strategy.
- Something wrong with their strategy execution.
So it’s important to avoid producing losses by following the wrong strategy. Most of us traders know that already. That’s why we spend so much time looking for good ones.
But what Jim Paul pointed out is that execution is as important as the strategy itself. This is where discipline comes into play. A great strategy will never work without disciplined application.
Ensure that your futures trading strategy is profitable. But don’t forget that you still need to focus on disciplined deployment of it to be successful. You need to perfect both sides for success.
For more day trading techniques, tools & strategies, check out these articles:
- 5 Questions To Ask Before You Start Day Trading For A Living
- How Much Money Can You Expect To Make Trading?
- 5 Simple Tips To Get Into Day Trading (With Success)
Day trading futures can be a rewarding activity. Take your trading to the next level with these five truths.
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