What is Day Trading Futures?
What are Futures?
First, we need to understand what Futures are in order to understand how to trade them. Futures are essentially standardized contracts that represent a certain amount, or quantity of an underlying asset to be transacted between two parties at an agreed upon price and date in the future. Let's unpack this with a simple example.
- A seller will have something they want to sell in the future. Maybe a wheat farmer who won’t harvest their crop for another 3 months, but wants to line up a buyer.
- A buyer has something they want to buy in the future. Maybe a cereal producer who is trying to smooth out their supply chain by ensuring they have enough wheat in 3 months.
Both the buyer and seller could make an agreement to buy and sell wheat from one another in the future, but what if one of them backs out? What if one of them sells that contract to a neighboring cereal or wheat producer because of unexpected changes in the business? What if the wheat isn’t of the agreed-upon quality?
Lucky for wheat and cereal producers, this has all been thought of before and is regulated by the U.S. Government in order to better facilitate efficient exchanges of goods.
Futures contracts are nothing but contracts that “derive” or more simply represent the value of an actual product, commodity, or financial instrument. They are characterized by:
- The date the transaction will be conducted
- Quantity or amount of the underlying asset
- Price per unit the transaction will be done at
- Guaranteed by an exchange ensuring buyers and sellers complete the deal
Because of this standardization and guarantee, they are easily exchangeable between parties. Meaning, they can be bought and sold nearly instantaneously between buyers and sellers, and are thus very tradable. Future Trading is the act of buying and selling futures contracts with the intention of making money on the price movements of the commodities or goods underlying the contracts. This sounds like a mouthful so let's unpack this.
Futures contracts were originally designed to help reduce the volatility of prices for goods being bought and sold. Examples included agricultural goods like wheat, corn, and cattle. They can also include other commodities like cotton or oil. Today, there are futures contracts that represent precious metals, currencies, even interest rates, among others. The point being, these are commodities or goods that are being bought and sold in large volumes around the world in the normal course of trade, and their prices move around.
Price moving around is normal and will fluctuate due to changes in supply and demand. However, because of the seasonality of consumption and other factors, sometimes prices move so violently that it inhibits global trade from actually occurring. The cereal producer and wheat producer never match up at the right time and both lose as a result. Futures contracts help reduce this volatility but still allow for price changes to occur over time due to changes in supply and demand.
How Does it Work?
How Do You Make Money?
As mentioned, Futures were originally designed to smooth out volatility of goods by making them more exchangeable and tradable between business parties. However, speculators are also able to participate in the futures market due to the standardization of the contracts and rules of the exchanges. For instance, it would be too difficult to buy 1000 barrels of oil in the hops of reselling it when supply gets tight and the price of oil skyrockets. However, a speculator who believes oil supplies will go down and prices will go up could buy an oil contract at one price, and sell it another when the price goes up.
This is essentially how every futures market works. Businesses who have a legitimate need to leverage a futures contact in order to hedge against risk of rising or falling prices, or rising and falling supply/demand, will buy or sell a futures contracts for normal business operations. However, these are only about 5% of the participants. 95% of participants in these markets are speculators, or traders.
The most stable assets in the world are currencies, backed by an entire countries economic system. This stability is why you can get 50:1 leverage on the most stable currencies in the world. Futures are not too dissimilar. Since each contract represents ownership in hard goods, the likelihood of those goods not being worth anything is very low. Therefore, futures contracts offer a highly leveraged asset to trade.
Take oil for an example, the cost of controlling one contract of Oil is typically around $3500 in order to enter the trade. One contract of oil represents 1000 barrels of crude oil, which as of May 2019, was worth approximately $60 per barrel. Meaning that one contract ($3500) represented $60,000 dollars worth of control. 17:1 leverage is a strong investment vehicle, and since commodities tend to move more dramatically than currencies, Futures offer some of the best trading opportunities in the world.
That said, margin in futures, contract specifications, speed of markets, and the funding initially needed to get into Futures Trading, are all good reasons to become familiar with the fundamentals of trading first, before stepping into a far more complex trading environment.
What Are The Pros & Cons?
- You don't have to create your own product.
- No inventory to store.
- You don't deal with shipping or customer service.
- You can build an affiliate business anywhere in the world with a computer and internet service.
- Inexpensive to start.
- Passive income.
- Many affiliate programs pay only a small percentage of the sale.
- Affiliate sales are one time purchases.
- You need a sizable audience to make solid income if you're marketing small ticket items.
- You don't have control over the product or customer experience.
Estimated Startup Cost
Key Activities Day Trading Futures
Day traders tend to spend most of their time using technical analysis to find trade opportunities. They'll study charts for patterns, use technical indicators, look at historical data, and other techniques used by technical analysts. At other times, traders are studying financials markets by watching relevant financial news, reading from financial papers, websites, and listening to analyst opinions about the market. While they aren't actively trading, they spend most of their time reviewing their trading strategies and learning new techniques that will make them a more efficient and successful trader.
Start Day Trading Futures
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Michelle Schroeder-Gardner runs the award-winning personal finance blog, Making Sense of Cents. She started blogging entirely as a hobby, and now currently earns over $100,000 a month blogging, with around $50,000 a month of that coming from affiliate marketing.
Her writing and advice have been featured on sites such as Huffington Post, Forbes, Yahoo, Cosmopolitan Magazine, Zillow, US News, Nasdaq, MSN, and more. When she's not blogging, you'll find her exploring via sailboat (we used to RV full-time!) with her husband and our two dogs. They sold their house in 2015 and have been traveling full-time since!
Module 1 - Getting Started
Module 2 - Building Your Website
Module 3 - Getting Your First Client
Module 4 - Optimizing Your Program
Module 5 - Group Coaching
Module 6 - Scale
Module 7 - Online Business
Module 8 - Congratulations
By Michelle Schroeder-Gardner