What Is Futures Day Trading?
By Tony Hosea

A quick definition futures day trading is actually pretty simple. Futures day trading is the type of futures trading which opens and closes a futures transaction within a single trading day.

Traders have become attracted to futures day trading for a variety of reasons. Some like the action level of an increased frequency of trades while others like the fact that futures day trading carries with it no overnight risk. In this way, no particular catastrophic political or business event, which may happen after the close of the futures contract will affect those who have already closed their contracts out during the day. The objective for traders here is to not allow any potentially adverse market movements to affect their equity.

Futures day trading falls into the category of short-term trading. As a general rule of thumb in trading, the shorter the period of the trading timeframe for smaller. The amount of profit per trade. Please keep in mind of course that this is a general rule of thumb, and does not apply to each and every case.

The frequency of futures day trading can go from relatively infrequently such as one trade per month or per every couple of months to many, many trades per day. It is the typical increased frequency of futures day trading, which daytraders must remain mindful of. The greater the frequency of trades, the greater the transaction costs become as well. The objective of course, of any futures daytrader is to turn a profit after all transaction costs have been factored in. I can’t even begin to tell you how many futures day trading results I’ve looked at that looked absolutely fabulous at the outset. Unfortunately many failed miserably and lost money consistently once the transaction costs were figured in.

Futures day trading can be both rewarding and profitable. The key here is to have both a good futures day trading system and an excellent level of discipline to take action as needed.

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The futures markets are organized and used not only for speculation but also for hedging, which is a method of eliminating risks arising from fluctuations in prices. Hedging may be referred to as the practice of covering the risks attaching to transactions in the cash market by contra-transactions in futures trading. If a commodity is purchased for delivery after three months in the cash market, where the actual commodity is handled, the trader may hedge the purchase by selling it for delivery after the same period in the futures market.

If the price of the commodity rises, the trader may sell in the spot market and buy in the futures market. The gain made in the cash market is offset by loss in the futures market, and the commodity is obtained at the price originally conceived for it. On the other hand, an agreement to sell in the cash market may be hedged by means of a counter-agreement to buy in the futures market. However, for such offsetting of losses, it is necessary that the prices in the cash and futures markets move in sympathy with each other.

There may be two forms of hedging: hedge sale and hedge purchase. When a person buys a commodity in cash, he may at the same time sell futures of an equivalent quantity as a protection against a fall in price during the time he holds such stock. Such sale in the futures market is called a hedge sale. If a manufacturer sells some goods for cash, he may protect himself against an advance in the price by purchasing futures for an equivalent quantity.

The basic purpose of hedging is to secure protection against fluctuations in prices. This protection is secured by shifting the risks of price changes to the professional risk-takers, i.e., speculators. A manufacturer who manufactures goods according to a carefully prepared budget can save him from the upsetting results of a rise in the prices of raw materials by hedging in the futures market.

Futures Trading provides detailed information on Futures Trading, Online Futures Tradings, Futures Trading Software, Commodity Futures Tradings and more. Futures Trading is affiliated with Stock Day Trading.

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A forward contract is a customized contract between two parties to buy or sell a specified quantity of a particular commodity at a specified price on a specified future date. Futures are exchange-traded forward contracts, i.e., forward contracts done in organized exchanges like stock or commodity exchanges.

A futures contract is standardized. To be more specific, futures being traded on exchanges have terms standardized by the exchange. The standardized items in any futures contract are: the quantity of the underlying product; quality of the underlying product (not required in financial futures); the date and month of delivery; the units of price quotation (not the price itself) and minimum change in price (tick-size); and the location of settlement.

In case of futures, after a trade is confirmed by two members of the exchange, the exchange house itself becomes the counter-party which guarantees every trade. Futures contracts are much more liquid and their price is more transparent due to the standardization and market reporting of volumes and price. A futures contract can be reversed with any member of the exchange. If futures contracts are priced above the spot price, it is known as the Contango market. If the futures price prevails below the spot price, it is known as Backwardation.

An option to buy is known as a call option, and is usually purchased in the expectation of a rising price; an option to sell is called a put option and is bought in the expectation of a falling price or to protect a profit on an investment. Options, like futures, allow individuals and firms to hedge against the risk of wide fluctuations in prices; they also allow speculators to gamble for large profits with limited liability. It costs nothing upfront to enter into a futures contract, whereas there is an immediate cost of entering into an options contract, called a premium.

Options Trading provides detailed information on Options Trading, Stock Options Trading, Futures Options Trading, Options Trading Software and more. Options Trading is affiliated with Options Trading.

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By Umashankar Galla

Futures positions in Indian Markets need be closed on the last Thursday of every month or the expiry month. In case of a holiday on the last Thursday the preceding day would be taken as the closing day.

Current Month Futures being the most active we generally take positions in these. Now rolling over these positions need be done incase we need to carry the position for some more time. As there would be a difference in premium or discount for the current month to the next month futures we would need to be careful and a proper strategy need be employed. It would be ideal to shift positions 0-3 days in advance.

Long Positions

At Premium: In case say we are holding Satyam Current Month Futures and the price is 400.00 & Spot price is at 398.00 and next month futures is at 402.00. We need to to watch the intraday trend. Incase it is up we Buy the next month futures say at 402.00 and wait for the up move to generate 2.00 (Or the Difference between the Two) + the commissions payable. Say the commission’s payable on both closing current month futures & entering next months futures is 0.25+0.25 i.e 0.50. We look at closing the current month’s futures position at 402.50.

In case the trend is down we shall sell the current month futures at 400.00 and wait for the down move to go down by 2.00 (Or the Difference between the Two) + the commissions payable. With the same example above we shall enter at 399.50 in the next month’s futures.

At Discount: Incase say we are holding Satyam Current Month Futures and the price is 400.00 & Spot price is at 401.00 and next month futures is at 399.50. Say the commission’s payable on both closing current month futures & entering next months futures is 0.25+0.25 i.e. 0.50. We just close current month futures at 400.00 and enter next month futures at 399.50.

Short Positions

At Premium: Incase say we are holding Satyam Current Month Futures and the price is 400.00 & Spot price is at 399.00 and next month futures is at 400.50. Say the commission’s payable on both closing current month futures & entering next months futures is 0.25+0.25 i.e. 0.50. We just close current month futures at 400.00 and enter next month futures at 400.50.

At Discount: Incase say we are holding Satyam Current Month Futures and the price is 400.00 & Spot price is at 402.00 and next month futures is at 398.00. We need to to watch the intraday trend. Incase it is up we close the current month futures say at 400.00 and wait for the up move to generate 2.00 (Or the Difference between the Two) + the commissions payable. Say the commission’s payable on both closing current month futures & entering next months futures is 0.25+0.25 i.e 0.50. We look at entering the nextt month’s futures position at 400.50.

In case the trend is down we shall sell the next month futures at 398.00 and wait for the down move to go down by 2.00 (Or the Difference between the Two) + the commissions payable. With the same example above we shall close the current month futures at 397.50 in the current month’s futures.

Further Ideas

Enter next months position 1-2 days in advance. Close current month on 1 day before or on closing day. This is especially true when strong trends are in progress.

Enter two or more positions in next month futures for intraday and close the surplus positions so as to get a better average price covering the difference in current & next month futures and the commission’s applicable.
This was written based on Indian Markets where Futures Contracts expire every month.

Good Luck & Happy Trading

Umashankar Galla is a Technical Analyst with 11 years experience trading the Indian Markets. He is into dvelopment of trading systems. His website is http://www.technitraders.com/ You could join the forums at http://www.technitraders.com/forums He can be contacted at info@technitraders.com

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Trading

Trading can involve high risk and is not for all traders. Trading futures covers many items, covering such as the currencies, energy, financials, grains, livestock, metals, stock indexes and also housing. Trading the futures does create other trading strategies and opportunities. Trading index futures also enables you to participate in broad market moves with one trading decision, without having to select individual issues. Trading futures provide other benefits apart from the hedging of the risks associated with the price fluctuation. Trading in the futures market is based on leveraging your money so before making the decision to participate in this market, make sure you understand this important concept. Trading futures means buying or selling in futures contracts. Trading futures of course has many advantages, which can be easily had only when a person understands the concept of trading futures completely. Before beginning trading futures, paper trading is the approach want to take before you ever lay down your money.

Futures

Futures trading is definitely much harder for day trading as there is a lot more chopping going on. Futures in general lend themselves to a variety of different trading time frames: Short, medium, or long-term. Futures contracts, like stocks, are traded on exchanges, found mostly in New York and Chicago. Future traders can short without an uptick, as required in the stock market. Futures trading has a bad reputation as being filled with risk and while there is risk, the truth is that futures trading is only as risky as a trader makes it. Futures trading is fast and fun but definitely not for everyone.

Conclusion

Investing in commodity futures is very straightforward and is very similar to other forms of investments, particularly stocks. However, trading index futures is a very efficient way to trade the whole market. Future traders do not just buy a commodity and hope it goes up, they have various trading strategies, and trading futures is actually investing in that strategy, not the commodity. To begin you must get a fully understanding of what the futures market is exactly. So know what you are doing before you begin.

Since 1995 AvidTrader has provided trading ideas that help you to make money. The last place you want to try navigating alone is the fast-moving financial markets. And at AvidTrader, you are not alone. AvidTrader led the way in March 1996 with its live Traders Chat. Members of AvidTrader can share their own ideas and strategies with each other on a daily basis in real-time. Go to http://www.AvidTrader.com or visit our blog at http://avidtrader.blogspot.com

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What do you mean by trading futures?

A futures contract is a financial contract to buy or sell an underlying instrument at a fixed date in the future, at a specific price. Trading Futures is the buying and selling of futures contracts. Futures contracts can be issued on a variety of financial instruments such as commodities, equities, currencies etc.

What are the advantages of trading futures?

In comparison to trading financial instruments directly there are a couple of advantages of trading futures contracts instead.

(1) Leverage: You are able to control larger quantities of the financial instrument with smaller amounts of money. An investor can control the underlying instrument by paying a fraction of the value of the contract (also called margin). In this manner the investor has access to 100 ounces of gold for a couple hundred dollars.

(2) Minimal transaction costs: Due to the liquidity of the futures market, the transaction costs are very competitive hence usually minimal.

(3) ‘Shorting’ and Tax advantages: Another advantage is that investors can “short” the futures contract or be the seller. This technique can be used to make money if the belief is that the price of the instrument is going down. In addition, there could be tax advantages in comparison with normal investing depending on the taxation laws in place.

What are the disadvantages of trading futures?

Leverage is a double-edged sword. In the case where an investor purchases a futures contract by making a payment equivalent to margin and the price of the underlying instrument goes down, then the buyer could lose more than the initial stake in the transaction. That is why its very important to understand why trading futures for this reason is considered risky.

The world of futures and options trading doesn’t have to be this complicated. Learn how to cut through the hype and learn the facts by visiting http://www.e-options.org/articles/ for more articles on options trading for beginners and eminis futures trading.

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The most commonly traded agricultural futures traded are Coffee, Sugar, Cocoa, Cotton and Orange Juice. We will look at these below

Coffee Futures

Trading Coffee Futures is a risky business. Coffee prices have been very volatile in recent years. As the Coffee price chart below demonstrates. Prices have fluctuated massively. Coffee is priced in cents per lb.

 Coffee Contracts are traded on the NYBOT exchange. One contract represents 37,500lbs of coffee.

Margin requirements are around $3,700 for initial margin and $2,700 for maintenance margin.

Orange Juice Futures

Orange Juice Futures are traded on the NYBOT Exchange. A contract is worth 15,000lbs of orange juice.

The Orange Juice Chart below shows how volatile orange juice prices have been in the past:

Cotton Futures

Cotton is used to make a number of textiles, so the price of cotton futures can influence many goods we buy. Cotton contracts are traded on the NYBOT exchange. One contract represents 50,000 lbs of cotton. Margin requirements are typically around $3,375 for initial margin and $2,500 for maintenance margin.

As the Cotton Chart shows, cotton prices have shown no consistent long term trend.

Milk Futures

Cows Milk is the most common source of milk consumed by humans after infancy. Milk Contracts are traded on the CME Futures exchange. One contract is worth 200,000lbs of milk. Margin requirements for the CME milk contract are typically around $1,350 for initial margin and $1,000 for maintenance margin.

As the milk chart above shows, milk prices have been fairly constant with a few periodic spikes.

Cocoa Futures

Most of us are family with cocoa. It is a major ingredient in chocolate. Cocoa Futures are traded on the NYBOT exchange. One Cocoa contract represents 10 tons of cocoa. Margin requirements of these contract is typically around $1,400 for the initial margin and $1,000 for the maintenance margin.

As the cocoa chart shows, cocoa prices like milk and cotton have showed no consistent trend.

Sugar Futures

Sugar is an used as beverages in many parts of the world. Sugar Futures contracts are traded on the NYBOT exchange. One sugar contract is worth 112,000lbs of sugar. Margin requirements for sugar contract are typically around $2,025 for initial margin and $1,500 for maintenance.

As the sugar chart shows, sugar prices has been subject to some big spikes over the years.

Equity futures are futures on stock market indicies. The biggest equity markets include the Dow Jones Industrial index, S&P 500 and the FTSE100 in the UK.

Trading Index futures is an ideal way to speculate on price movements of the big indicies without having to physically own the shares. One advantage that makes equity index future trading appealing is the fact that these contracts typically have a low margin requirement.

Equity Index Future Pricing

The pricing of equity futures is quite easy to understand. The way the pricing works is the amount of interest you could earn in cash minus the dividends that the shares would pay. For example if the US benchmark interest rate was 3% and the Dow companies paid an average of a 2% dividend over a year, A contract with a one year expiry would be around 1% more expensive than the current spot price. If interest rates are very low in a country, more distant contacts can even be cheaper than near contracts. Equity index futures are more appealing to many traders when interest rates are low.

Dow Jones Futures

Dow Jones Futures are futures contracts on the Dow Jones Industrial Index. The Dow is made up of the biggest companies across nine industries.

Dow Jones Chart

As you can see from the Dow Chart. The dow performance between 2001-2003 was very poor. This was a major bear period for most of the global stock markets.

Dow Futures Contract

A standard dow contract is 10 times the index value. For example if the index is priced at 13,000 points, the contract will be for $130,000.

There are also mini sized dow futures (also known as dow emini). These contracts are half the size of the standard contracts.

The Symbol for Dow contracts is ZD. The mini dow contract symbol is YM.

This futures contract is traded on the CBOT exchange. The initial margin requirement is currently $7,005. The maintained margin requirement is $5604. The margin requirements for the mini contract are half of this.

FTSE Futures

FTSE Futures are contracts on Britain’s top 100 companies. The FTSE 100 companies make up the majority of the capitalization on the London Stock Exchange, around 80%. Some of the top companies include Royal Dutch Shell, BP, Barclays PLC, HBOS, Vodaphone.

FTSE Chart

As you can see from the chart, the ftse performance has been fairly similar to the dow.

FTSE Contracts

FTSE 100 Index futures are priced at 10x the FTSE price. For example if the FTSE is priced at 6,000, the contract will be £60,000. Margin requirements are typically around £3,000 initially and £3,000 for maintenance.

The FTSE 100 futures contract symbol is LFX.

Nasdaq Futures

Nasdaq Futures are futures contracts on the Nasdaq 100 index. The Nasdaq contains companies both in and out of the United States. The index is tech heavy and does not include financial companies.

Nasdaq Chart

As you can see from the chart, the Nasdaq performance has been good in recent years, but fell drastically during the tech bubble burst.

Nasdaq Futures Contract

One contract is 100 times the price of the index. For example if the Nasdaq was priced at 2,500 points, a standard contract would be worth $250,000. There are also mini nasdaq contracts that are half of this value. Margin requirements are $16,250.00 for the initial margin and $13,000 for maintanence. The requirements for the mini contract are half of this. The symbol standard nasdaq contracts is ND and NQ for the mini contract.

S&P 500 Futures

The S&P500 consists of 500 large cap stocks. The vast majority of these are companies based in the United States.

SP 500 Chart

As you can see from the SP 500 chart, the S&P performance was good between 2003-2007, rising by around 50%. However, 2001-2003 was poor and the beginning of 2008 wasn’t good either.

SP 500 Futures Contract

The SP 500 contract is 250 times the price of the index. For example if the S&P 500 is currently priced at 1,500 points, the contract will be $375,000. This is too high for many traders. There is also a mini contract. The mini contract is 5 times smaller than the standard contract. Margin requirements for the standard sp500 contract are around $22,500 initially and $18,000 for maintenance margin. The symbol for the standard contract is SP and the symbol for the mini is ES.

Generally I recommend that traders develop their own trading systems rather than buy one off the shelf.  Why?  When you build your own, you can tailor it to your own trading style, and test it thoroughly to make sure it works.

However, building your own trading system is not for the faint hearted.  It takes time, inspiration and plenty of backtesting.

There is one other approach, and that is to find one through a site called Collective2 (www.collective2.com).   Collective2 allows you to see the real life track records of trading systems designed by other people.  If there is one you like, you can subscribe to it for a monthly fee.  They have integrated execution for many of the systems so that your system can even trade your account, or you can simply place the trades yourself.

The main benefit of Collective2 over buying a trading system advertised on the Internet or through a magazine is that the site itself monitors performance over time.  In fact, they trade each trade.  You can search for a system that meets your risk profile.  For example, you may wish to look only at systems with smooth equity curves. The search function will return these.

Users of a system can rate it. This allows you to see how other traders have fared with the system. Quite often a system will return good results, but these may require a huge number of very quick trades. Users will tell you if the system is untradeable.

Once you have found a system that looks like it is interesting, you can view the usual statistics - Sharpe ratio, win/loss ratios, average size of wins compared to losses and other figures. You should look for a system that has a track record - it is relatively simple to get a great performance over a short period by chance, then get hit by a string of losses. A good system will perform consistently over time. Beware of systems that have low Sharpe ratios, or where the average size of losses exceeds that of profits.

Collective2 is not a panacea for your futures trading. There is no perfect system, and even the best system will face substantial losses from time to time. However, it does give you the option of finding someone else’s system, and getting some insight into how it will perform over time. That said, if you can build your own system, you will be able to tailor the risk levels to your own tastes.

Here are some simple futures trading rules, which come from our experience, and that of successful traders.

Don’t overtrade

Overtrading is when you trade more positions than are justified by the amount of margin in your account. For example, if you have $10,000 in your account, this does not mean that you should trade 10 positions. In fact, you should probably trade 1 or 2 positions.

Overtrading reduces your ability to absorb losses and continue trading. Losses are a fact of life for all traders, so plan accordingly. You should trade about 1/5 of the maximum number of positions that you can open.

If you don’t have the capital to cover a full sized contract, consider the mini-contracts offered on some exchanges.

Take a medium to long term view

The shorter the trading timeframe you take, the more of your profits will be taken in trading expenses. In addition, it is more difficult to trade short term positions because trends may change very quickly, and you will need to watch the market constantly.

If you take a medium to long term view, you can benefit from trends that are relatively easy to identify. You will need to tolerate larger adverse movements, but can also take larger profits. The amount of time required is far less.

Never add to a losing position

If you have a losing position, you should have an exit plan which includes a stop loss. Don’t make your position worse by adding to a losing position. This simply magnifies your losses, should the adverse movement continue. If you have made a mistake, then close out the position and put it behind you.

Don’t trade against the trend

It is a mistake to try to pick market tops or bottoms (reversal points). Wait for the market to clearly indicate a trend rather than trying to pick the change in trend, and ending up trading against the prevailing market trend. Trading against a trend is a sure way to lose money.

Develop your own trading system

Every successful trader uses a system. A good trading system will result in average profits greater than average losses, with a manageable level of risk (measured by drawdown, or the maximum adverse impact on your account).  A system needs to tell you when to enter the market, how much risk you need to take in a position (which will determine your stop loss) and when to exit (it is unlikely that your system will be able to tell you what the exit point should be at the time when you enter a position).

Develop your own trading system so that you can be confident of its effectiveness, and not be tempted to second guess it. We recommend against buying someone else’s system.

Don’t trade fast markets

A fast market is where some important news has been released, and the market moves very quickly in response. This is not a good time to trade because you can’t be sure of prices really are, as reporting will tend to lag - you’ll get bad fills which may be compounded by a sudden reversal in direction.

If you take a longer term perspective, you won’t need to be unduly concerned with very short term fluctuations in the market, so there will be no need to attempt to trade on releases of market information

Always use a stop loss

You should always use a stop loss to prevent huge unforeseen market movements from wiping out your account. Your trading system should help you quantify the maximum adverse movement you can incur before being wrong. You should place your stop loss when you open your position.

Let profits run

It is always tempting to take a quick profit, but successful traders cut losses short, and let profits run. Your system should give you a clear signal when to take a profit. If you take small profits, it is unlikely that you will make enough to cover the inevitable losses.

Manage your risk

Managing risk is all about understanding and limiting the potential impact of sudden market movements. One way of limiting risk is using stop losses, which is discussed above.

As well as not overtrading, you also need to be aware of the total risk in your trading portfolio. Some commodities tend to move in the same direction (that is, they are highly correlated). For example, grains will tend to be correlated.  If you have several positions in correlated currencies, they could be acting like a single larger position which increases your risk.

Conclusion

Following these basic rules will help you survive and prosper in the fast moving futures markets.