Futures can give you even more trading opportunities than the stock market. Futures market is open 23.75 hours per day while the stock market is from 9:30 – 4:00 pm only. Furthermore when you use account money to trade futures, you can trade as many times per day as you wish but with stocks once a trade is executed, the trade must be verified by the Federal bank and you cannot use that account money for 2 days. Lastly futures trading can involve buying long or selling short; that is not always possible with stocks. Given the intraday price swings in futures, future traders can use the volatility of the market to their advantage with a thoughtful trading strategy.
With this resource, we’ll cover some of the basics of futures trading, including the following:
- What are commodity futures?
- What is futures trading?
- How do you trade futures?
- Can you day trade futures?
What Are Commodity Futures?
The word “future” in the term “commodity futures” should indicate to you exactly what it is. It is the right to buy or to sell a certain amount of a physical commodity at a certain future date.
Each future is backed by a certain amount of the underlying commodity. For example, when you purchase a West Texas Intermediate Oil future, you are buying the right to be able to take delivery of one barrel of oil whenever the future’s expiration date comes. Of course, as an average investor, you will not be taking physical delivery of the commodity but would instead be selling your future positions or rolling out your trade to a longer duration before the contract expires.
Nearly any agreement to buy can be made into a futures contract. Not only are there physical commodities such as oil, corn, and cattle, but there are even futures on stock market indices and interest rates. Practically anything can be considered a commodity, but it is most often an agricultural product or a raw material. Commodity futures are listed on an exchange so they are a standardized product.
What Is Futures Trading?
Commodity futures allow you to trade based on your predictions for underlying commodities’ price movements on an index such as the S&P 500. If you believe that there will be more demand for an index future such as oil down the line, causing the price to increase, you can buy oil futures without having to physically hold the oil yourself in your backyard.
Futures can be bought or sold with extreme use so long as you have enough money in your account. Since they are exchange listed, there is always a two-sided market in the future so you can buy or sell it around the clock.
Ideally, you are hoping to profit by buying the future at a lower price and selling it for a higher price. However, you can also take a position by “shorting” the futures contract. This means that you sell it before buying it back later on in time. You do this because you think that the price will be going down, and you can buy the contract back for cheaper.
How Do You Trade Futures?
Trading commodity futures is much easier than you think. The first step is the simplest, and that is gathering up some funds and opening an account with a broker who has futures trading capability. Some futures trading brokers offer you excellent trade platform solutions that you can use to effectively access the markets.
Note that you may not have an unrestricted ability to trade the markets. Your broker has a responsibility to set controls, such as margin requirements, on your account that are commensurate with your experience level. Thus, when you open an account, you will need to provide information about your level of experience with the markets.
One of the keys to trading futures is being familiar with the markets. You should know how to look up a price and be able to follow the trading action in the futures contract.
Then, you should take the time to develop an educated opinion of where you think the price of the particular future is heading. This could be based on your intuition or on a particular trading strategy that looks at the price chart of the futures. The most important thing when you are trying to learn how to trade futures is to be objective when you are thinking about a particular commodity. This means thinking with your head as opposed to your heart.
When you have developed your own trading idea, you will log into your trading account and place an order, paying the initial margin required to open a buy or sell position on a contract. You can either place a market or a limit order for your futures.
Your trading strategy can be short-term speculation or a long-term investment. The great thing about the futures market is that it supports a wide variety of different trading strategies.
You will finally need a trading platform (Trade Station, Sierra, Ninja, etc.) and a data feed (Rithmic, Continuum, etc.); these can be set up by your broker.
Can You Day Trade Futures?
Futures prices can be very volatile on an intraday basis. Some futures can change prices even more rapidly than stocks on a percentage basis. This makes futures very well-suited to day trading. The daily price swings in these futures lend themselves to sound intraday trading strategies that take advantage of this volatility.
Of course, your broker may have rules for day trading futures. It is best to take some time to learn how the markets work before you move headlong into this strategy given the risk that is involved. In addition, your broker may impose certain limitations on how you day trade or may require certain account minimums before you can begin a day trading strategy. Nonetheless, futures are an ideal market for day trading because the capital requirements for this type of strategy may be less than you would find on the stock market.
In addition, futures brokers may also give you the leverage that you need to enhance your trading profits. Of course, leverage also means risk, so you will need to be sensible about how much leverage that you decide to use based on risk disclosures.
Commodity futures are a great way to get involved with trading and the stock market at less up-front capital than many other types of investments. Consider whether futures trading is the right move for you and your portfolio. For more information about Targets Trading Pro and what it can do for your futures trading, feel free to learn more about our algorithmic trading solution or contact us today!