From covering a few obscure agricultural products to dominating trading for a wide range of different assets, futures have grown. The most widely traded securities on the market include futures for volatility.
It was designed to allow buyers and sellers of raw materials to lock in prices funded trading accounts. All manner of investors use futures for hedging and speculation without the need to worry about the ownership of the underlying asset.
The value of futures contracts changing hands is much larger than the trading volume for the underlying asset.
Many day traders are drawn to futures trading because of the enormous potential profit and the ability to trade markets that would otherwise be out of reach.
Some of the key features of futures trading are important to day traders.
What Is a Futures Contract?
A futures contract is an agreement between the buyer and seller to exchange a certain amount of a good, usually with a specified grade or quality level, for a specific price and on a specific date
Many futures contracts now specify the option for a cash settlement, where the buyer of the futures contract has the option to settle the contract based on the cash difference between the contracted price of the underlying good and its market value.
One of the great things about trading futures is that they don’t experience time decay like options do. If it doesn’t move quickly enough you could lose out on profits due to time decay, which is a huge bonus.
The valuation of futures is different than the valuation of traditional securities.
A futures contract’s value is derived from the value of the underlying asset and the time until it expires.
It is the time value of a derivatives contract that makes futures unique.
The time value of a derivatives contract is determined by the potential price variation that can happen between the present and the future.
A futures contract with a strike price of 75$ may have a different value because the price of a barrel of oil may change between now and the date of the contract’s final DropCatch.
Because most contracts are set to expire in a short amount of time, traders are only allowed to place a small portion of the contract’s value.
This means that futures traders have access to a significant amount of leverage via their futures exchange and whatever leverage their broker provides.
It is possible to make highly speculative bets on many potentially volatile assets. The potential for gains and losses is only realized by what options traders experience.
leverage can be a double edge sword because on one side you have the ability to make outsized gains while on the other side you can lose more than your account is worth. You have to be very careful with your futures trading and make sure you have hard stops in place at all times.
To trade futures you will need to find a broker that will give you explicit permission to do so. Not all brokers offer futures trading, and most require a minimum amount of knowledge or experience in futures trading, a minimum account balance, or both
When you have access to the futures market, you need to decide what kind of futures you want to trade.
The futures for different asset classes will behave differently and each exchange will have its own rules for trading and settlement, all of which a day trader must understand before they can start making reliable trades
Steve, head futures trader at WE Trade Desk, said that trading futures allowed him to speculate on prices of commodities at a fraction of the cost and the nearly around-the-clock access to the markets for most markets let him manage risk prudently.
Those with higher risk tolerance and the discipline to manage trades objectively can be great futures traders.
Futures Trading Strategy
Unlike most bonds and equities for which day traders have access to all public information, futures contracts only cover assets that are lightly regulated and for which little or no public information exists.
Day traders will be going against institutional traders with an understanding of fundamental factors that can be hard to match.
Most day traders trade on technical factors in the futures markets because they have an advantage over other investors. Day traders can take advantage of futures contracts.
If you want to start with futures in your portfolio, you can analyze the futures indices which include the S&P futures and the NASDAQ futures.
Market Profiling is a strategy used by technical traders in the futures market to find value areas to trade against.
Like any other trading instrument, futures need to be approached with a firm understanding of how they work in order to succeed. Future are:
Trade almost all day and night
Not susceptible to time decay
Don’t need a lot of capital to trade.
The benefits are large. Adding the TAS Market Profile to your charting is a must if you want to trade futures. Institutional and retail traders use it for futures trading.