Futures trading can be an extremely lucrative yet challenging endeavor for beginners. With the right strategies, platforms, and instruments, futures provide ample opportunities to grow your capital. This comprehensive guide covers all the essentials for profitable futures trading.
Table of contents
The Best No Loss Strategy for Futures
While there are no surefire ways to completely avoid losses in futures trading, certain strategies can help minimize risks:
Use Stop Losses
Stop losses allow you to preset exit points to limit potential losses on a position. For example, if you buy a contract at $50 with a stop loss at $47, your loss is capped at $3 per contract if the market moves against you. Stop losses are one of the most important risk management tools.
Trade Smaller Positions
Don’t risk too much capital on a single trade. Trade smaller position sizes so that any single loss does not cripple your account. Only risk 1-2% of your account per trade as a general rule of thumb.
Do not trade with too much leverage relative to your capital. Overleveraging is dangerous as it magnifies both gains and losses. Use leverage of 10:1 or less when starting out.
Practice Proper Money Management
Employ sound money management techniques. Only risk capital you can afford to lose, and use proper position sizing and stop losses. Master money management and your trading will improve drastically.
Use Trailing Stops
Trailing stops help lock in profits as the market moves in your favor. The stop price “trails” the market and adjusts automatically to secure profits. This helps reduce risks without limiting the upside.
The Best Futures for Day Trading
The most suitable futures contracts for day trading exhibit high liquidity, narrow spreads, and decent volatility. Some of the best include:
- E-Mini S&P 500 – Highly liquid with excellent volatility. The benchmark equity index contract trades 23 hours a day.
- Crude Oil – Extremely liquid and volatile. Watch out for news events that cause price spikes.
- Gold – Very liquid with plenty of intraday movement. Geopolitical uncertainty causes volatility.
- NASDAQ 100 – Follows the tech sector so exchanges hands in high frequencies. Reacts well to earnings reports.
- 10-Year T-Notes – Major government bond contracts influenced by monetary policies and economic data.
- Euro FX – Reacts well to news and events concerning the eurozone economy. Trades nearly 24 hours.
In general, focus on the most liquid futures markets that offer solid movement each day. Avoid illiquid markets where spreads are too wide.
The Easiest Market for Futures Trading
The easiest futures market for beginners is widely considered to be the E-Mini S&P 500. Here’s why:
- High Liquidity – As one of the most heavily traded futures, entering and exiting trades is easy. Spreads are tight.
- Long Trading Hours – The E-mini trades 23 hours a day from Sunday afternoon to Friday afternoon. Offers ample setups.
- Low Margin Requirements – The required margin is low relative to other markets, currently around $6,000 per contract.
- Lower Volatility – As a broad market index, volatility is lower compared to commodities or currencies. Moves are more predictable.
- Abundant Resources – There is a wealth of learning resources available as the E-mini is widely followed.
- Technical Nature – Price action and technical analysis work very well in the E-mini compared to fundamentals-driven markets.
For these reasons, most professional futures traders recommend starting with the E-mini S&P 500. The ample liquidity makes it ideal for newcomers to dip their toes without facing excessive risk.
Futures vs. Options – Which is More Profitable?
Both futures and options offer opportunities for profits, but futures are generally easier for most day traders. Here’s why:
- Wider Availability – Many more futures markets exist compared to options on those same underlying.
- Higher Liquidity – Futures tend to be much more liquid, with tighter bid/ask spreads.
- No Time Decay – Futures do not suffer from time decay like options do, allowing flexibility in trade duration.
- No Complicated Greeks – Futures pricing is simple compared to options “Greeks” that measure risk sensitivities.
- Less Capital Intensive – Most futures have lower margin requirements than similarly sized options plays.
- Easier Shorting – Shorting futures is uncomplicated. Options involve special strategies for shorting.
- Intraday Trading – Futures are ideal for intraday trading. Options suffer from wider spreads and decreasing liquidity.
While options potentially offer larger percentage returns, futures are generally easier to trade for short-term gains. Futures pricing is simple and the markets are incredibly liquid across the major contracts.
4 Main Types of Futures Trading
There are four main trading methodologies used in the futures markets:
Day trading involves buying and selling contracts within the same trading session, profiting off small intraday price movements. Positions are closed out before the market closes. This requires solid short-term analysis skills.
Swing traders hold positions for days or weeks, capturing larger swings and trends in the market. This style focuses more on overall price patterns and momentum over time. Requires patience and discipline.
Scalpers hold positions for mere minutes or seconds even, profiting off tiny price changes. An extremely fast-paced style, scalping requires quick reaction times, low commissions, and tight spreads to be profitable.
Position trading involves holding positions for months at a time to profit from long-term trends. Technical analysis like chart patterns and indicators are used to spot emerging trends early and ride them out.
Day trading and swing trading are most common among futures traders. Ensure your personality fits the style you wish to pursue.
The Best Futures Trading Platforms
Some of the top futures trading platforms based on costs, reliability, and features include:
- TD Ameritrade – Excellent all-inclusive platform with free futures trades, education, and market research. Great for beginners.
- NinjaTrader – Top platform for active traders with a focus on automation and backtesting. Advanced functionality.
- Tradovate – Leading futures broker with full-featured yet easy-to-use trading platform. Very low commissions.
- E*TRADE – Longtime broker with full-service futures trading, market analysis tools, and reliable mobile apps.
- TradeStation – Sophisticated platform great for quantitative traders, with advanced analytics and automation capabilities.
The best futures trading platform for any individual depends on their specific needs and preferences. Novices are better served by easy-to-use platforms with great education resources like TD Ameritrade. Active and quantitative traders needing robust trading tools are better suited for TradeStation or NinjaTrader.
Key Takeaways for Success
Futures trading offers substantial opportunities but managing risks is critical. Use stop losses on all trades, start with 1 contract at a time, and find the trading style that best fits your personality. Focus on the highly liquid E-mini contracts popular for day trading like the S&Ps, NASDAQ, and gold.
Master solid technical analysis based on price action principles. And lastly, choose a reputable trading platform that provides the tools, education, and resources needed to give you the best odds for long-term trading success. Follow these guidelines and you will be well on your way to profiting from the futures markets.