Pros and Cons of Day Trading Futures

robot hands typing on a laptop keyboard representing day trading futures.

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Day trading is the strategy of buying and selling a futures contract 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

A day trader must follow the strict discipline to be successful. 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 discipline is 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 the 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 a Major Factor for Day Traders

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

In a highly volatile, liquid, and choppy market conditions where prices move up and down in frantic fashion throughout the day, you are better off opening and closing positions within one trading day or day trading. However, in trending markets, you may have 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.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.