To become a successful day trader of futures contracts, the individual must understand fully how futures contracts work. Given the risk inherent in trading (investments are not guaranteed by the government), most people learn many trading terms, methods of analysis, and other trading facts before they even begin simulated trading ("paper trading"). Jumping prematurely into day trading futures can cause loss of thousands of dollars. However, an individual who begins slowly and learns the futures markets thoroughly will be able to move successfully into simulated trading, followed by day trading with real money.
Learn Futures Trading Terms
To learn how to trade futures well, one must begin with the vocabulary of trading.
- Waldemar Puszarkz's web page, Emini Basics, states that futures are speculations about the change in price of a stock or an index - for example, will the S&P 500 (500 stocks selected by the company Standard & Poor's) go up or down by a specific time in the future, and by how many points?
- Full index futures are expensive and can be traded only by institutional investors such as mutual funds. That is why, in 1998, the mini futures contracts were created. The e-mini is actually the mini future of the S&P; however, the term is often used for the mini version of any market.
- The book Trade to Win by Thomas Busby, published in 2009 by Wiley Trading (Hoboken, NJ)explains that e-mini contracts are now available for most U.S. stock indices, such as the U.S. Dow, S&P 500, NASDAQ, and Russell 2000. They allow the individual investor to participate in the futures markets without having a large amount of money. Trading of e-minis is purely electronic (GLOBEX); they are not traded on the floor of an exchange.
- When a futures trader goes long, he or she buy a specific futures contract. Conversely, when going short, he or she sells the futures contract.
- According to Busby, a futures day trader is a person who closes all open positions before the end of the trading day. All long trades are sold; all short trades are bought back.
- Futures contracts have expiration dates on a quarterly basis beginning in March.
- Puszarkz points out that the e-mini margin, the amount of money one must have available in order to buy or sell a contract, is much smaller than the required margin for a full index future.
This is only a small sample of futures trading terms. Understanding futures terms is the bedrock of the knowledge every futures trader needs.
Futures Markets
As indicated above, e-mini futures are available for most U.S. indices, as well as for commodities and currencies. Busby states that an individual day trader can also choose to participate in a number of different foreign stock markets. Some of the most popular include the DAX (Germany), NIKKEI (Japan), HANG SENG (China), CAC (France), and FTSE (London).
The most popular futures markets include:
- Dow Jones Industrial Average
- S&P 500
- NASDAQ
- RUSSELL 2000
- GOLD
- OIL
- EURO
- DAX
- NIKKEI
- FTSE
Technical Analysis of the Markets
Technical analysis includes a great number of techniques that can help the trader determine when to buy or sell e-mini contracts (as well as stocks, bonds, and other trading instruments). On his website schooloftrade.com, Joseph James explains that the analysis may be based on computation (moving averages, fibonacci lines, stochastic) or patterns in the price chart (ABCD, Elliot Wave, pivot points). The variety of techniques available allows the individual trader to choose one or more that best fit his or her thinking style. Technical analysis of futures markets is something every trader should know, even if only in broad terms.
Another method some traders use for day trading e-minis is based on watching individual sales as time passes. This is called "time and sales" and is equivalent to the old ticker tape used before the markets were computerized. According to CMEgroup, a division of Chicago Board of Trade (CBOT), the Market Profile Method includes time and sales but also uses statistical data to produce information about the movement of the given index.
Risk and Futures Trading
Risk is a large part of trading, regardless of the type of trading or the methods used. Futures such as e-mini contracts may gain or lose money. Therefore, this article is for informational purposes only and is not to be considered investment advice.
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