Futures Trading Systems
Last updated on April 17th, 2020
Many traders I come across seem to start off by trying to day trade stocks or Forex and for many years this concept was pretty alien to me.
If you want to be an active day trader, futures are really the way to go. But to some, the world of futures trading is a dangerous business – a world where fast money and blown up accounts often go hand-in-hand.
The simple fact is that this is not an unusual reality in the industry. But there’s another reality for those who understand the risks involved and maintain appropriate safeguards: trading futures markets is one of the most efficient ways to use your capital.
LEVERAGE In The Futures Market
Leverage certainly has the potential to be a case of Dr. Jekyll and Mr. Hyde. I don’t think it’s too hard to find horror stories of traders being over-leveraged and blowing up their accounts. It’s not uncommon for a trader who has taken a few “bad beats” to go “on tilt”, trade erratically and double up (or perhaps worse) on their losing positions.
But even without this very real aspect of trading, many traders just don’t realize what the odds of them having a sustained period of draw down are and so they are less likely to fully appreciate the need to address how much capital they should risk over how much capital they can risk.
Let’s look at some figures to put into perspective just how much leverage you can get as a trader of futures.
The E-mini S&P 500 (ES) trading at a level of 1600 gives a trader control of $80,000 of product (index level x $50 per point for this product). Current CME exchange margin is $3,850 per contract which equates to a leverage of roughly 20:1.
Whilst that’s pretty high it’s not exceptionally so. Enter the brokers.
For day trading, brokers offer a much lower intraday margin rate. In theory a low intraday margin is useful for a well-capitalized account if you don’t want to leave all of your capital sitting in your account.
However, in practice many traders will use these low margins to trade with much less capital than is realistically required. Typically a broker will offer you $500 intraday margin and I’ve seen as low as $400 per contract for the ES.
At the same 1600 level that’s a leverage of 200:1.
That’s 8 points to zero or a 0.5% move in a product that typically has a primary session range of 10-20 points. And it’s important to note that margined accounts can fall below zero, meaning that if the market moves sharply against you and losses are greater than the capital in your account, you will be liable for the difference.
But just like everything else in trading, it’s an individual’s responsibility to ensure that they fully comprehend the risks involved and act in their own best interests. If you take account of the risks, the ability to highly leverage your trading capital can be a powerful ally.
If you have a genuine edge in the market that has demonstrated will make money over time, then being able to trade more contracts than you would normally with the capital you have is a distinct advantage. If you stick to a 1-2% risk per trade with a 2-3 point stop in the ES, you only need $5,000-15,000 per contract for example.
Clearly there’s the opportunity to turn a relatively small amount of capital into a great return.
Futures Markets Have Great LIQUIDITY
In fairness, there are plenty of futures instruments that have poor liquidity just as anything else could that you might look to trade. But there are reasonably high numbers of really great products to trade, with a variety of different behavioral features and risk profiles that also have fantastic liquidity.
Many instruments don’t even have a bid-ask spread in the front month contract.
An important point is that futures contracts are agreements to deliver (or take delivery of) the underlying product at a certain date and therefore they expire. So if you hold a long (buy) position in Crude Oil into expiry, you will be expected to take delivery and pay for a whole load of barrels of Crude Oil.
Some products are cash settled instead like the ES for example. It’s for this very reason that a futures trader will never normally want to hold a position into expiry. The front month is the nearest expiring futures contract (except when approaching the expiration date) and this is where the liquidity for an instrument is normally found.
The main point about liquidity though, is that you’ll never really have a problem getting into or out of a position in the markets.
CENTRALIZED REGULATED EXCHANGES
The futures industry is highly regulated and whilst there are those who try to get away with nefarious activities, they are often identified swiftly and dealt with appropriately. Regulatory requirements are stringent and are there to protect traders.
And because the exchanges are centrally cleared, effectively meaning that all trades goes through the exchange (although this isn’t 100% accurate it is true for the most part), there is accountability for all trades that take place. Simply put, you get what you see in most cases when you trade. Direct market access means no funny business from your broker too. Your trading platform links into the exchange.
Because of this, the quality of futures markets is high.
The bottom line is that if you are a sensible, responsible trader who treats this as a business, futures markets offer a fantastic way to trade. They are efficient, cost effective and properly regulated. Sure, like any other product there are a few nuances to learn.
But if you’re serious about trading and day trading in particular, you should seriously consider trading futures.