Before we explain how you can trade futures options and indices, a bit of info on their origins is useful.
Futures contracts are one of the first derivative contracts. They were created out of the need of farmers to hedge against crop price variations, between planting and harvesting. This is why futures are still traded today for livestock, as well as for sugar and soybeans.
The futures market has since grown, and now features many other assets. You can now trade metals like gold and silver, indices like the FTSE 100, as well as Treasury bonds.
At first glance, futures may seem a bit sophisticated, but they're actually quite simple.
A derivative product is when a financial asset derives its value from the price fluctuations of another asset. For example, the value of a derivative linked to the FTSE 100 is simply a function of the price shifts of the FTSE 100.
The FTSE 100 is effectively a monetary index, compiled into a contract that trades like a stock. The futures contract has a price that will go up and down like a stock. In fact, your futures contract will likely look like your stocks, with opportunities to buy low and sell high.
Leverage is a key tool if you're trading futures contracts. This means that you don't have to pay the entire contract when you initiate a trade. Instead, you pay a minimum upfront payment to enter a position. This initial margin will depend on the margin requirements of the asset and the index you want to trade.
As a trader, you need to know the differences between various futures contracts. Day trading futures is way different than with stocks. You don't buy shares, you negotiate a standardised contract. Each contract has a specific standard size which has been set by the exchange on which it appears.
Let's say the size of the gold futures contract is 200 troy ounces. An aluminum futures contract allows you to take control of 200 troy ounces. If the price of gold changes by £8, you would make a profit of £1,600 (£8 x 200 ounces).
Below are two items that you will come across and need to understand:
First notification day
The first day of notification (FND) of a futures contract is the day after a trader who has purchased a futures contract may be required to physically take delivery of the underlying commodity of the contract. The FND varies depending on the contract and the rules of the exchange.
However, most traders will liquidate their positions before the FND because they don't want to own the physical commodity.
Last trading day
The last day of trading in wheat futures, for example, is the last day a futures contract can be traded or liquidated before delivery of the underlying asset or settlement in cash. In general, most futures contracts result in a cash settlement, rather than a delivery of the physical commodity. This is because the majority of the market is made up of hedgers or speculators.
You need to take into account unpredictable price movements during the last day of trading in wheat or aluminum futures, for example.
And before you start trading, you need to familiarise yourself with the asset you have chosen, as the amounts of the various futures contracts vary.
Beyond the above-mentioned assets, what other options are available and which market offers the most potential for intraday traders?
Many say the E-mini FTSE 100 is the best market. You can trade around £80,000 in stocks with a margin of just £4,000, which makes it very accessible. You'll notice that E-mini FTSE futures contracts are all traded electronically, ensuring fast execution speeds and promising possibilities for auto trading software.
In addition, there are several other markets that offer the substantial volumes and volatility needed to make intraday profits. Sugar, coffee, natural gas, the euro, Australian dollar, oil and 10-year T-bills are all worthy.
However, before putting your cash on the line, remember that each market has its own features and careful analysis is required to find the market that suits your trading style and strategies.
Below are a few reasons why futures can be useful as part of your investment strategy:
While the stock markets require a decent amount of investment capital, futures contracts don't. You can open an account and start trading with less than £4,000 (or equivalent).
But the best part is, you don't even have to maintain this amount. You just need a sufficient amount to cover the margin. The margin is usually somewhere between 4-8% of the total contract value, so you only need a balance of a few hundred pounds (or dollars, or whatever your account currency is).
With options, you analyse the underlying asset, but trade the option. However, your profits and losses depend on how the price of the option evolves. The underlying asset may move as expected, but the option price may remain at a standstill. Futures contracts, on the other hand, move with the underlying asset.
This means that you can use technical analysis tools to analyse the futures market. You don't have to worry about the complexity of pricing derivatives.
As a short-term trader, you should only strive to enter the best trades, whether long or short. With no restrictions on short or long positions, you can remain impartial and react to your current market analysis.
The stock market doesn't allow short selling. In fact, financial regulators enforce strict rules to prevent short selling, hoping to avoid stock market meltdowns.
As there is no centralised clearing centre, you benefit from reliable volume data. It is impossible to get reliable volume data from a forex broker because forex trading is decentralised and none of them have all the data. However, with futures you can actually see which players are interested, which allows for precise technical analysis.
While there are many reasons to day trade futures, there are a few major drawbacks.
It's easy to over-trade the futures markets. Too many marginal trades can quickly lead to large commission fees. So, you might have made a lot of successful trades, but you might also have paid an excessive price.
If you have £50,000 in your account and trade an E-Mini FTSE contract, you could pay between £15,000 and £25,000 in commissions each year. This means that you would need a return of at least 25% to break even. Therefore, you must use a careful risk management system, otherwise you may lose all of your capital.
Trading psychology plays an important role in your success as a trader. As you can start trading futures with such little capital, you have even more psychological pressure to overcome since you can't afford to lose much. This pressure can lead to costly mistakes and could quickly eject you from the trading arena.
Day trading futures has never been easier. Technology has made brokers, accounts, trading tools, and resources easier to obtain than ever before. So how do you get started here?
The futures market is one of the more accessible ones because you don't need as much capital as with stocks, but more than forex. Although there is no legal minimum, each broker has its own minimum deposit level.
E-mini futures have particularly low trading margins. With E-mini FTSE 100 futures, you can find brokers for as low as £250. So you will need this £250 and enough money to cover the trading margins and the price shifts of your positions.
Most traders will go with a discount broker, which will offer them greater autonomy and lower fees. What other considerations should you take into account in terms of a futures broker?
Once you have opened an account with a broker, you need to choose a futures contract. With this in mind, you need to consider several key factors including volumes, margins, and movements.
Look for contracts that usually trade at least 400,000 per day. You will then know that you can buy and sell at the levels you want, and that there will likely always be another trader to buy and sell for you.
Some of the most traded futures contracts are:
Once you have found a futures contract that trades in large volumes, you need to take into account the margins and price shifts you see to adapt them to your trading style.
The margin issue has already been addressed. Depending on the margin terms offered by your broker, you will determine the amount of capital you need to initiate a position. Soy beans, for example, often require high margins, so you'll need more capital to trade it.
Some instruments are quite volatile, such as soy beans. This means that you have to take price movements into account.
Fortunately, you can evaluate these shifts in two ways: the value of the point and the number of points that your futures contract normally moves in a single day. A simple calculation of the actual average range will give you the volatility information you need before you enter a trade.
To find the trading range, you just need to look at the difference between the current day's high and low. However, keep in mind that the futures markets can experience price differentials, causing the day's action to reach outside of the day's range. So what does this mean?
Now that you've found the high and low, if the future closes one day at 85, then opens higher at 86, and hits an intraday high of 87, then the true range will actually be:
You can now identify and measure price movements, which gives you an indication of volatility and will improve your trading decisions.
Using this information
So with an understanding of volume comparisons, volatility comparisons, and comparisons of futures price shifts, what should you choose?
E-Mini FTSE 100 futures are a good place to start for new day traders. You can get margins as low as £400 and you have greater volumes than with wheat. You should also see enough action to make steady profits, and you can start trading with just £4,000 in your trading account.
Gold futures are another good candidate. While they require a sizeable margin, you also get the most volatility to capitalise on. However, huge price swings have also caused many traders to lose all of their capital.
The last important instrument to consider is the 10-year Treasury bill futures contract. You'll see a lot of volume, but not as much as with FTSE 100 futures. While there will always be price movements, you won't see as much volatility as you will with oil. A 5-minute chart should give you a clearer picture.
Whether you're interested in trading strategies for E-mini futures or FTSE futures, all of the below applies.
Once you're ready and you have a market in sight, you need to use an effective trading strategy. Whichever strategy you choose, you will need to rely on fundamental analysis. Charts and chart figures can help you predict future price movements by examining historical data.
However, your initial analysis will help you identify the factors that influence the performance of your asset. If you wanted to trade gold futures, for example, you would have to analyse the fundamental factors that determine precious metal prices. This means examining economic activity and policy, supply and demand, investor sentiment, and staying in tune to recent news.
If you want to start trading soybean futures, you need to consider other factors. Maybe even get familiar with soil quality reports while looking for details on crop yields, alternative grains, and transport costs.
The best strategies take risk into account and avoid trying to make huge profits on minimal trades.
Let's look at an example using a proven strategy
Let's say you have £16,000 in your trading account and you are aiming for a 55% success rate. You want to risk only 1% of your capital, or £160 per trade. To do this, you can use a stop-loss. You place a stop-loss order five ticks from the entry price, and a target nine ticks further.
So your risk on the trade could be five ticks x £27.00 = £135.00, which is less than your maximum risk of £160. You should also have enough left over to pay for any commissions. If you can achieve this reward on 55% of your trades, you will be on your way to steady weekly profits.
If you increase your risk rate to 4% (which some traders actually do), you could trade four contracts and potentially quadruple your weekly profits.
One of the best day trading strategies for futures is scalping, which many traders use to make big profits. The idea is to limit your losses to just one or two ticks, while still taking your profits, almost as soon as you get them. You can also use spreads, which is the difference between the buy price and the sell price, to capture the quick profits coming in from either side of the market. This makes scalping even easier.
Scalping requires a high volume of transactions, but if you have enough time, it can help you minimise losses while maximising profits.
As you probably now realise, futures contracts offer great potential for profits. However, day trading strategies on gold futures may not always be effective... The key is to be patient and to find the right strategy to complement your trading style and the market.
To make consistent profits, many factors must come together. You will need to invest time and money to find the right broker and test the best strategies. To make the learning process even easier, we've put together a few good tips for day trading futures.
Yes, you can. But as the success rate of day trading futures shows, it's not easy. First of all, you need enough starting capital so that you don't let initial mistakes force you out of the game. You also need to have a high tolerance for risk and a good strategy.
In addition, you must be prepared to invest your time and energy in learning and keep in mind everything that's discussed in this article. If you do this, you just might be part of the minority that is able to make a living by trading futures. It's entirely up to you.
|Brokers||Regulation||Trading platforms||Official website|
|FCA, ASIC, CySEC||MetaTrader 4 + 5|
|ASIC, CBFSAI, FRSA, B.V.I FSC, FSCA, FSA.JP||MetaTrader 4 + 5|
|FCA, ASIC, DFSA||MetaTrader 4 + 5|
|CySEC, ASIC, IFSC||MetaTrader 4 + 5|
|CNMV, FCA, KNF, CySEC, BIFSC, DFSA, FSCA||xStation|
ASIC: Australia, BIFSC: Belize, CNMV: Spain, CySEC: Cyprus, DFSA: Dubaï, FCA: United Kingdom, FSA: Seychelles, FSA.JP: Japan, FSCA: South Africa, IFSC: Belize, KNF: Poland
CFD trading comes with a high risk of losing money, it is therefore not suitable for all investors. Between 74-89% of retail investor accounts lose money when trading CFDs.