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 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.

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 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.

Frequently Asked Questions (FAQs)

Why don't pattern day trading rules apply to futures?

If you're day trading stocks, you'll need to maintain an account equity balance of at least $25,000. This rule doesn't apply to day trading futures, because futures contracts are regulated by a different entity. Stocks fall under the jurisdiction of the Securities and Exchange Commission (SEC), and the SEC imposes the pattern day trader rule. Futures are overseen by the Commodity Futures Trading Commission (CFTC). The two government agencies are similar, but they do have their differences, including different restrictions over who can day trade.

When does the actual day start and end for futures day trading?

A day trade is defined as opening and closing a position within the same day, but the nearly 24-hour trading window of futures complicates that definition. In reality, it doesn't matter how a trader defines a day trade when they're using futures, because there aren't any restrictions on day trades as opposed to swing trades. The CME Group maintains the schedules for different futures products in the U.S., but the hours won't line up cleanly with the start or end of a calendar day.

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  1. Securities and Exchange Commission. "Margin Rules for Day Trading."

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