The Best Futures Trading Strategies: Day Trading

Previously exclusive to financial experts, day trading has become widely accepted and accessible to the general population. Powerful computers, high-speed internet, and the development of the brokerage sector have all made this possible. The majority of US brokers and prop firms have removed entrance barriers to the point where opening a trading account requires no minimum deposit.

Because day trading allows you to work from home and has significant potential cash benefits, it is understandably appealing. The fundamentals of day trading, how to get started, and the associated dangers and opportunities will all be covered in this essay.

What Is Day Trading

Considered among the most popular futures trading strategies, day trading seeks to profit from intraday price changes. A day trader will, by definition, close their positions before the day is out, despite making numerous trades within that time. The idea is to quickly lock in profits from day-to-day price swings. Day traders do not have to pay interest on the margin they use, and they also avoid the risk of maintaining market positions overnight by doing this. Other trading strategies with different durations involve swing trading, long-term investing, and scalping. Hyper short-term trading, or “scalping,” is the practice of entering and exiting deals in a matter of seconds or minutes. Swing trading on the other hand involves holding market positions for several days, weeks, or months. Lastly, long-term investments often entail positions held for more than a year.

Becoming a Day Trader

To become a day trader, you must fulfill a number of crucial conditions. The following are some important things to remember:

Sufficient Funding
In the United States, you must have $25,000 in your trading account in order to actively day trade equities.

The Necessary Hardware
The ideal computer has a quick CPU and high-speed RAM. It could be beneficial to have more monitors for charts and other data.

Adequate Internet Connection
When it comes to day trading, speed is everything.

A Reputable Broker or Prop Firm
Choose a trustworthy broker or prop firm that offers affordable costs, prompts, dependable execution, and excellent customer support.

Direct Market Access Direct (DMA)
Consider dealing with a broker that offers Direct Market Access if you intend to day trade equities. This will allow for quicker order execution.

Educate Yourself
Ann C. Logue’s book Day Trading for Dummies is a helpful resource for novices and Mark Douglas’s Trading in the Zone is a famous work on trading psychology. Many people believe that John Murphy’s Technical Analysis of the Financial Markets is the most authoritative book on the topic. You can find additional information about futures trading basics.

Plan of Action
Select a trading approach that works for you and use a demo account to test it out. In order to experience trading in real market conditions without having to risk any real money, the majority of prop firms provide free demo accounts.

Day Trading Tactics

The following are a few of the most widely used categories of trading methods in day trading:

Trend Trading: Capitalizing on the condition that an asset keeps moving in the direction of a dominant trend. A trader uses a breakout strategy or trend trading, would look for a price to “break out” above or below a significant technical level and continue in the direction of the larger trend.

Mean Reversion Trading: The objective behind this kind of strategy is to profit from the tendency of prices to return to typical levels following a dramatic price surge. One indicator that’s used in a mean reversion trading technique is the Bollinger Bands.

News Trading: One example of a news trading technique is basing a trading decision on the way economic data was received in comparison to analyst estimates. For instance, a day trader might choose to purchase S&P 500 futures or the SPDR S&P 500 Trust ETF (SPY) if US employment data beats expert estimates.

Price Action Trading: This trading strategy makes little to no use of indicators and instead focuses only on price movement on a chart. Patterns like “pin bars” and “inside bars” can provide insight into whether the price will stick with the trend or possibly move in the other direction.

Gaps Trading: On a chart, gaps are areas where there is little to no activity in between sharp increases or decreases in the price of a financial asset. Frequently, gaps occur outside of usual trading hours. Basic steps in a gap trading strategy involve the following: Identify the range during the first hour of trading, find a stock that has gapped higher or lower, and then choose to purchase when the price climbs above the top of the range or sell when it goes below the bottom of the range.

Moving averages, oscillators, and volume are key indicators for day trading. Simple strategies can be effective, and the best stocks for day trading are highly liquid and volatile. Stock screeners can identify stocks above-set price levels and those with high market turbulence, providing more opportunities for day traders. Choosing the right stocks for day trading is also crucial for success.

Capital Necessary for Trading Futures

Day trading requires varying amounts of money depending on the market. CFD markets can be daytraded with as little as $100, with substantial leverage. Futures market entry is higher, but can be done with a few thousand dollars. pattern day traders execute four or more day trades within five business days, maintaining at least $25,000 in their margin account. Many traders struggle due to undercapitalization, so it may be worth waiting until minimal risk is involved to reach profit objectives.

Cash or Margin Account for Day Trading

You have the option of opening a margin account or a cash account when you open an account at a brokerage company. Your purchasing power is constrained by the amount of money in your cash account. You can borrow money from your broker to fund trades with a margin account. Although each type of account has pros and cons of its own, margin accounts are usually better for day traders.

Principal Attributes of a Margin Account

With a margin account, traders must abide by the Pattern Day Trader (PDT) guideline, which stipulates that in order to make more than three day trades in a five-day period, traders must have at least $25,000 in cash on hand.
Retail brokers typically offer 4-to-1 intraday margin and 2-to-1 overnight margin as conventional levels of margin. This implies that you might take on $200,000 worth of market positions intraday and up to $100,000 worth of market positions overnight with a $50,000 account balance.
While trading from margin accounts carries a higher risk of loss, it also has the ability to increase profits.
You can short sell securities with a margin account, which increases your trading opportunities.
You bear the risk of having a margin call, which could force you to liquidate your market position. It’s possible that you’ll be prompted to add more money to your account.
For any position held overnight, traders are required to pay interest on the margin used. Since $0 commissions are now the standard, one of the few ways retail brokers can still generate money is through margin interest rates, which vary per broker.

Principal Attributes of a Cash Account

A cash account offers an exception to the Pattern Day Trader rule. With less than a $25,000 balance, day trading is feasible.
On the other hand, funds utilized in a cash account are subject to a settlement period that ends two business days following the date of the transaction.
A margin call is when a broker requests that you deposit more money into your account to cover a losing position. Cash account holders do not have to experience this.
Securities cannot be shorted within a cash account. Since you are selling something you do not own, short selling necessitates a margin account. You are borrowing the stocks from your broker when you short sell them.

Additional Information

Momentum trading strategies involve capitalizing on stocks making major moves for the day, looking for volatile stocks with high volume and a catalyst like earnings or breaking news. The goal is to enter trades in stocks experiencing short-term, fluid trends driven by momentum and exit when momentum fades. Classic chart patterns, such as Head and Shoulders Tops/Bottoms, Double Tops/Bottoms, and Bull/Bear Flags, can be used by day traders.

The Head and Shoulders Top is a bearish reversal pattern, with price falling below the neckline with strong volume. The Double-Top is a bearish reversal pattern, with price breaking below the support level of the trough in-between the two highs. The Double-Bottom is a bullish reversal pattern, with price breaking above the resistance level of the high in-between the two lows.

When it comes to Bear and Bull flags, the latter pattern is an upside down flag on a pole, with the buy signal occurring when price breaks out above the resistance of the upper trend line, and the Bear flag pattern occurs when price breaks out below the support of the lower trend line.

Bottom Line: Is Day Trading Worth It?

To be completely frank, day trading is a challenging profession with a low success rate, with most traders end up failing. However, those who succeed and can endure the rigors, it can be incredibly financially rewarding.

It’s important to only risk money that you can afford to lose, similar to gambling. Lastly, profits from trading result in capital gains, which are typically taxed at a lower rate than short-term gains.