Day Trading Futures - Advantages and Disadvantages

Day Trade Futures

What is Day Trading?

Day trading is the strategy of buying and selling a futures contract(s) within the same day without holding open long or short positions overnight. Day trades vary in duration; they can last for a couple of minutes or at times, for most of a trading session. It takes lots of knowledge, experience and discipline to day trade futures successfully.

Advantages of Day Trading Futures

All positions must close by the end of the day, and no positions remain overnight when day trading futures. A futures day trader should sleep well at night as no risk exists. Most of the time, futures open at a much different price than where they closed the previous day. Price volatility means that the chances of unexpected losses or profits rise when positions remain on the books at the end of a trading session.

One can learn a great deal about the futures markets in a short period by day trading. Day traders typically make more than a few trades every day; compare that to position traders who might make only one trade a week. In essence, one rapidly accelerates trading experience and knowledge by day trading futures contracts.

Disadvantages of Day Trading Futures

One must follow strict discipline to be a successful day trader. The temptation to make marginal trades and to overtrade is always present in futures markets.

Commissions can add up very quickly with day trading. Many day traders wind up even at the end of the year, while their commission bill is enormous. For example, a trader with a $20,000 account that day trades one e-mini S&P contract, may have $5,000 - $10,000 in commissions at the end of the year. The day trader would have to make a 25-50% return on trading to break-even.

Most people who day trade futures are not able to earn money. A lack of preparation and disciple in usually their downfall. Day trading can be an unforgiving game. However, for those willing to do homework, develop a plan, and stick to it with discipline, it can be a profitable venture.

Best Markets for Day Trading Futures

The market of choice for many day traders is the E-mini S&P 500. It is a pure play on the stock market where futures traders can control around $75,000 worth of stock for about $3,500 in margin. The E-mini S&P futures are electronically traded, which makes trade executions very fast and liquid. The Dow futures, E-mini Nasdaq futures and E-mini Russell futures are also popular among futures day traders who focus on the stock market.

The 10 Year T-Notes, soybeans, crude oil, Japanese yen, and Euro FX all have enough volume and daily volatility in their futures prices to be candidates for day trading. Each futures market has different characteristics, so one needs to study the markets before day trading to uncover and optimize techniques and develop a plan.

Volatility Is The Major Factor For Day Traders

There are times when the benefits of short-term of day trading outweigh the benefits of long-term investing. The volatility of markets tends to dictate which approach to markets is most suitable.

I find that in highly volatile, liquid, and choppy market conditions where prices move up and down in frantic fashion throughout the day, I am better off opening and closing positions within one trading day or day trading. However, in trending markets, I have had more success holding positions overnight and trading on a medium or long-term basis. Longer-term trading can mean holding a long or short position overnight, a few days, weeks or for more extended periods. Volatility tends to be a day trader’s paradise and an investor’s nightmare. However, the lack of volatility in markets can often frustrate day traders.

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