DAY TRADING FUTURES COMMODITIES
WHAT IS DAY TRADING?
Day trading requires that all contracts whether bought or sold be closed on the same day as they were established.
If a day trader buys a contract, then it must be sold prior to the closing bell on that day for that particular market.
Day trading can be done in essentially any market that has sufficient liquidity and that
provides the trader with real-time access to prices and immediate order execution. The latter is typically a benefit of
online or electronic trading. The most popular markets for day trading include futures, forex and select stocks.
Day trading enables the trader to establish a position over very short time intervals to capture brief price movements. The sudden rally or drop
in price following the public broadcast of a news event or the release of an economic statistic presents a common day trading opportunity.
So does the sudden break up through technical price resistance or down through support that is often followed by a continued price movement.
Still other day traders look for arbitrage opportunities among the prices of related assets. Many day traders
believe that their chances are better when forecasting price movements over very short time intervals rather than trying to forecast over
weeks or months in advance.
WHY DAY TRADE?
Day trading has two major advantages. First, because positions are not held overnight, day trading may be less risky than
position trading in which open contracts are held for several days or more. If day trading futures, the margin required is correspondingly
less, usually about half of the standard requirement though sometimes even less and this makes day trading futures more affordable.
Second, many day traders enjoy the relief of knowing that all trades terminate by the day's end so no sleep is lost at
night worrying over any open positions. Each day represents a new opportunity to earn profit.
WHY DAY TRADE FUTURES or COMMODITIES?
Futures or commodity contracts are available across a broad spectrum of markets including equity indices like the S&P 500, government bonds and notes, grains, meats,
energies, precious metals and even foreign exchange. Such a wide diversity of markets means that the futures day trader can almost always
find an opportunity somewhere.
Many futures contracts trade electronically and this provides the necessary immediate market access. Moreover, the trading platform
provided by a broker typically includes real-time market news, charting capability and even a menu of technical analysis tools
all designed to support day traders.
There are a number of futures that have sufficient volume and liquidity to enable the timely execution of buy and sell orders
and whose underlying interest or asset has a price volatility sufficient enough to provide day trading opportunities. After all, the more
that a price changes during the day, the greater is the potential for profit (and loss!) when day trading.
Day trading futures is done on a regulated exchange within an industry that is itself regulated. In the United States, the
federal regulatory agency is the Commodity Futures Trading Commission.
Regulation not only helps to ensure a level playing field but also provides a clear mechanism for dispute resolution.
Beyond this, day trading futures holds some key advantages over day trading stocks (within the United States).
For example, the margin or cash required to open a futures account for day trading is not subject to the
Pattern Day Trader Rules
that apply when day trading stocks or equities. Also, how futures trading profits are treated and taxed
make day trading futures more advantageous than day trading stocks.
Finally, many futures brokers provide a real-time demo account where a beginner can test their skill at day trading futures
as well as learn the functionality and features of the trading platform without cost or risk. See Futures Demo
in the box, General Topics, at right and above.
WHAT MAKES DAY TRADING FUTURES POSSIBLE?
In the traditional days of open outcry, to day trade futures meant that you had to physically stand in the trading pit
or have a direct communication line to someone who was in the pit. This was the only way that you could both know
and act upon current market bids and offers. The privilege of standing in the pit is extended
only to exchange members so day traders had to spend money - at times a considerable amount of money - to either buy
or lease an exchange membership. The physical presence requirement plus high entry fee meant that few people could day trade futures.
Moreover, even someone who was day trading futures had the disadvantage that, because they can only be at one place
at one time, trading was confined to the futures pit in which they were standing.
All of this changed with the movement of exchanges to an electronic order matching platform - the beginning of electronic
trading. This electronic platform serves as a virtual exchange trading pit where orders are accepted, stored and, if possible, matched
and disseminated.
By connecting to the exchange order matching platform - such an electronic interface is provided by the broker - a retail
trader literally anywhere in the world can both receive real-time market bids and offers on electronically traded contracts
and execute buy and sell orders with the speed and reliability necessary for day trading.
The original intent of the exchange electronic order matching platform was to enable trading in contracts during the hours
outside of the open outcry session. In other words, it was a supplement to the traditional way of trading. However, popularity
of electronic trading encouraged the exchanges to expand the electronic session so that now, most futures contracts
are available for electronic trading practically around the clock, from Sunday evening until the Friday close. Consequently,
the world of day trading futures has now been opened up to the retail trader who can day trade efficiently and conveniently
from the comfort of their home or office.
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