Investing in Stocks vs. Forex vs. Futures

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Many people, when thinking of the stock market, think that it involves only buying and selling stocks. However, there is much more going on in the markets than buying and selling stocks.

Day traders participate in not only the stock market, but in the futures and foreign exchange (forex) markets also. Each of these markets works differently. If you're thinking about day trading it helps to learn more about stocks, forex, and futures so that you can make informed decisions.

Key Takeaways

  • Stock day traders buy and sell stocks based on price movements throughout a trading day.
  • Futures day traders buy and sell derivatives and options based on the daily price changes of commodities futures contracts.
  • Forex day traders buy and sell currency pairs throughout a trading day, trying to take advantage of exchange rate changes.

What Is Day Trading?

Day trading is the act of purchasing and selling (or selling and purchasing) the same security on the same day in a margin account. While the quick buying and selling of securities can be exciting and lead to a quick profit, substantial risks are also involved. It is easy to lose a significant sum of money very quickly.

Day Trading Stocks 

Stocks give you a piece of ownership in a company. If you're thinking of day trading stocks, here are some key facts you should know:

  • In the U.S., the minimum required starting capital to be a pattern day trader is $25,000.
  • Market hours are from 9:30 a.m. to 4 p.m. ET. Many day traders also place trades in the hour leading up to the open, called the pre-market. 
  • Some of the best times to trade shares are from 8:30 to 10:30 a.m. and 3 to 4 p.m. ET, when volume and volatility tend to be high.
  • There's a vast number of stocks you can trade.

A pattern day trader is someone who executes four or more day trades within five business days. If you want to trade less than that you're not required to keep the minimum, but it might be tough to find a broker who will let you trade with less.

The stock market might be a good place for you to day trade if you have $25,000 available. If not, then you might consider forex or futures, which require less capital.

Keep in mind the best stock trading times. If you can't trade during the optimal trading hours, then your efforts are unlikely to be as successful as they would be if you could trade during those hours.

Day Trading Futures

Futures are agreements to buy or sell a commodity at a future date. You can speculate on the direction the commodity price will move and trade on the price changes. If you're thinking of day trading futures, here are some key facts you should know:

  • There's no legal minimum amount required to day trade futures. The more money you have, the more flexibility you will have in your trading decisions.
  • Trading hours for the E-mini S&P 500, whose ticker symbol is ES, are Sunday through Friday from 5 p.m. to 4 p.m. CT with a trading halt from 3:15 p.m. to 3:30 p.m. daily and a daily maintenance period Monday through Thursday from 4 p.m. to 5 p.m. 

Most futures day traders focus on opportunities in one futures contract type after gaining proficiency at trading it. That said, there are day traders who prefer to trade where the action is, choosing futures contracts that are seeing big movements or volume on a particular day.

If you're planning to day trade, create your strategy and stick to it. For many investors, buying and holding stocks is a better strategy for long-term profits.

Based on those factors, you'll likely be able to see whether the futures market one that you might want to day trade on. If you have less than $25,000, then futures might be a good place to start.

If the ES isn't a good fit, consider day trading a global commodity, such as crude oil or futures associated with European or Asian stock markets.

Day Trading Forex

Foreign currency exchange trading involves using capital to invest in foreign currency based on how you expect exchange rates to fluctuate. Forex trading can be very risky and isn't appropriate for every investor. If you're thinking of day trading forex, there are some essential facts you should know:

  • Some forex brokers don't have a minimum investment requirement.
  • Forex trades 24 hours a day from 5 p.m. ET on Sunday to 5 p.m. on Friday.
  • The best times to day trade forex depend on the pair being traded.

One good rule of thumb for deciding how much to trade is not to exceed 1% of your forex account on a single trade. If you want to trade $100 at a time, your account should have at least $10,000.

There are many currency pairs to choose from, but new day traders should probably stick to the EUR/USD or GBP/USD. Those pairs offer more than enough volume and price movement to provide day trading income.

The British pound/U.S. dollar (GBP/USD) may be best traded from 4 a.m. to 6 a.m. ET and 8 a.m. to 11 a.m. ET. The euro/U.S. dollar (EUR/USD) may be best traded from 9 a.m. to 2 p.m. ET.

Using this information, you should see whether the forex market is an option for you. If you have limited capital to start day trading, then forex might be best for you. The forex market is also flexible in that you can trade outside of U.S. market hours, which helps if you have another job during regular U.S. business hours Monday through Friday.

Deciding What to Trade

The stock market may be the simplest option to understand when compared to forex and futures. It also requires a significant amount of capital. If your funds are limited, forex and futures may be best. With forex, you can start simply by focusing on one currency pair at a time.

You can take a similar approach with futures, but understanding how the futures market works is complicated. Regardless of which option you choose, study and develop a strategy before you begin to invest.