Futures are a type of derivative instrument that derive their value from an underlying asset. Futures contracts are standardised, so you can trade them on a futures exchange. The underlying asset can be anything from commodities, such as oil and gold, to financial instruments, such as stocks and bonds.
Day trading involves taking positions in futures contracts and then selling them off before the end of the trading day. Traders do this to profit from the price movements that occur during the day. Navigate here to learn more about futures trading.
Research the markets
Before you start trading, it is essential to do your research and understand the market you are entering. It will help you make informed decisions and trade with confidence.
When researching the markets, there are a few things you should keep in mind:
- What is the underlying asset?
- What is the tick size? (This is the minimum price change that can take place)
- What is the contract size? (This is the amount of the underlying asset that each contract covers)
- What is the margin requirement? (This is the amount of money you need to put down to open a position)
- What are the trading hours?
Choose a broker
Once you understand the markets, you need to choose a broker. Not all brokers offer day trading, so you must ensure your broker offers this service.
When choosing a broker, there are a few things you should keep in mind:
- What is the minimum deposit?
- What are the fees?
- What are the spreads? (The difference between the buy and sell prices)
- What are the products offered?
- How is the customer service?
Open a demo account
Before trading with real money, you must practise on a demo account. It will give you a good understanding of how the market works and help you develop your trading skills. Most brokers offer demo accounts, so you should be able to find one that suits your needs.
Fund your account
Once you have opened a demo account and are happy with the broker, you can fund your account and start trading.
You need to deposit enough money to cover the margin requirements when funding your account. Margin requirements vary from broker to broker, so check this before funding your account.
Place your trade
Now you can place your first trade. To do this, you need to:
- Choose the market you want to trade in
- Choose the direction you think the market will move (up or down)
- Choose the amount of money you want to risk
- Choose the expiry time
After collecting all this information, you can place your trade.
Monitor your trade
Once your trade is placed, monitoring it and seeing how it develops is important. If the market is moving in the direction you expect, you will make a profit. If the market moves against you, you will make a loss.
You can monitor your trade by checking the price chart and seeing how the market moves. You can also set up alerts so you are notified if the market reaches a specific price.
Close your trade
When you are happy with the profit or loss you have made, you can close your trade. To do this, you need to:
- Choose the market you want to close your trade in
- Choose the direction you want to close your trade (buy or sell)
- Enter the amount of money you want to risk
- Choose the expiry time
After collecting all this information, you can close your trade.
Risks of trading futures
When trading on margin, you are borrowing money from your broker to trade. If the market moves against you and your losses exceed your deposited amount, your broker will issue a margin call, requiring you to deposit more money into your account to keep trading.
If the market moves in defiance of your prediction and your losses exceed the margins set by your broker, your position will be liquidated. Your broker will close your position, and you will lose all the money you have invested.
The markets can be volatile, so prices can move suddenly and dramatically, causing losses if you are not careful. You must always use stop-loss orders when trading to limit your losses.