Futures trading is the buying and selling of futures contracts. A Futures contract is an agreement between two parties to sell an asset at a predetermined price, at a specified time in the future.
There are 2 types of participants in the Futures trading, hedgers and speculators. Typical Futures traders are speculators seeking to predict price movement. A hedger is someone who protects against future price fluctuations of a commodity.
A quick example of a hedger: Say a clothing producer who works with wool. They expect the price of wool to go up in the near future. To offset the added cost, they buy greasy wool futures contracts. If the price of wool does go up, they make money on the trade which offsets the rise in costs.
This article will concentrate on the speculative futures trader. We’ll focus on day trading futures.
Futures contracts are a form of derivative, they derive their value from an underlying asset. The futures markets are the most diverse markets. There are many types of underlying asset available.
At the contract’s date of expiration, the buyer must purchase, or seller must sell the asset. The buy/sell is at the predetermined price. A futures contract doesn’t need to reach expiry, a trader can exit at any time at current market value. Speculators don’t allow the contract to expire as buyers would be obligated to receive the asset, and sellers to provide it. We don’t want that.
You can trade futures on any of the major exchanges, but you’ll want to focus on one that has the best liquidity. This is the exchange where the market is most active and where you’ll be able to find more opportunities.
Each of the major stock market indices are available to trade almost 24/7. In our own live trading room, we trade four separate sessions throughout the day. This makes Futures trading one of the more accessible markets for when you can trade.
The most unique thing about futures trading is the ability to connect to these markets without an OTC broker. We use a trading platform called NinjaTrader which connects directly to an exchange. This means we get our data from the exchange, and execute to the exchange.
Being able to directly connect to the exchange allows us to access ‘true price’ rather than the price a broker chooses to set.
Here are some of the major markets that you can trade Futures on:
Stock indexes (S&P500, NASDAQ etc)
Metals (Gold, Silver etc)
Oil and Gas
Benefits of Futures Trading
You already know about one of the major benefits of futures trading, direct market connection. This is not the only benefit to trading futures, there are many. Let’s look at some of those benefits.
Another benefit of futures trading is that it is often less expensive than other types of trading. You won’t find the same expensive commission structures with futures trading. Instead, you’re charged a fee based on the size of your order. This means that you can trade larger volumes without incurring large costs.
No Pattern Day Trading Rule
Pattern day trading is where you buy and sell securities based on patterns that you see in the market. The goal of pattern day trading is to make profits by taking advantage of short-term price movements. To do this, you need to develop a rule for how you will trade securities based on the patterns that you see.
A trader that wishes to day trade is considered to be a pattern day trader. The pattern day trader rule states that, if you wish to day trade as a pattern trader, you will need $25,000 minimum in your account.
If your account is under the $25,000 threshold, you will only be able to trade 3 intra-day trades per week. This seriously limits a trader’s ability to build an account. The pattern day trader rule is the least liked rule amongst new day traders within the stock market.
Luckily for Futures traders, not such rule exists. Futures traders are able to access the markets with no limits to trade numbers at a much smaller cost.
Low Entry Requirements
Futures are friendly to traders with smaller accounts. As already mentioned, you don’t need $25,000 in an account. You can open a trading account with as little as $400 (USD) with some providers. An account of around $2,000 to $3,000 is a reasonable stating price for some.
Not only are the account size requirements smaller, the futures markets also offer E-mini and Micro E-Mini options. The Micro E-Mini contains the same contracts, but require a smaller margin to trade. This works for smaller accounts to have a lower risk compared to E-Mini futures.
The major Futures markets are highly liquid, this means that there is a lot of volume traded. The benefit of liquidity in trading is that a trader can enter and exit trades instantly.
In less liquid markets, a trader may need to wait for an opposing buyer or seller to facilitate the trade. If you’re unable to enter into the trade quickly you may enter at a less desirable price.
The futures markets are the most diverse amongst the financial markets. Many asset classes are available to trade, futures offer opportunity for diverse trading.
This is helpful because a diverse range of assets allows a trader to focus on markets worth trading. A given market may not always provide opportunity, and each market has good times to trade. Diversity provides the option to see opportunities across many markets.
Leverage is a major benefit of futures trading. With leverage, a trader can multiply their investment by borrowing against the asset traded. This allows them to take larger profits without needing to risk the full value of the trade.
The use of leverage can increase your profits but also increase the risk of loss. Understand the risks associated with using leverage before taking any trades.
Futures offer a level playing field for market makers and retail traders alike. Futures traders receive data direct from the exchange, so they get the ‘true price’. This means that you get the actual market value and not a broker’s interpretation.
The margin requirements for the major futures markets rarely change. This means that traders know what to expect when it comes to how much margin is required per contract.
The pricing for futures is far simpler than that of options contracts where things like time decay come into play.
The futures markets are among the most regulated. When it comes to trade most other products, a trader needs to put faith in their broker. A broker isn’t concerned with your success as a trader, and in some cases can even trade against you.
Because each futures market runs on a single exchange, there is no individual with the power to affect your trading other than yourself.
Drawbacks to Trading Futures
Futures trading offers opportunities to gain exposure to assets that otherwise not available in the open market. But it’s important to understand the risks involved before investing.
Leveraged trading can be a very profitable strategy, but it can also be risky. Using leverage may bring a larger loss if the value of the underlying asset moves against you.
The use of leverage also increases the risk of losing money if the market moves against you. If you use too much leverage, your investment may become worth less than your account funds.
There are also risks associated with being in a futures position for an extended period of time. If the market remains volatile, a trader may find themselves unable to exit their position at a profit. This could lead to a loss of all or more than your full account size.
Expiration Dates Need to be Tracked
All futures contracts have a predetermined expiration date. Even if you have established fixed prices, as the expiration date nears those prices can become much less attractive to others. At times, this condition can cause futures contracts to expire as worthless investments.
This doesn’t apply to day traders, but you need to make sure you load the right contracts to your trading platform.
Commissions Can Stack Up
Futures contracts have commissions based on a per contract basis. If you trade many contracts and do so often, these fees can stack up.
To combat this, you need to only trade one or two of the best trades per session. You will need to seek profit targets that account for commissions. Calculate a rough tick size value for the commission for your typical trade. Consider this when deciding your average tick target per trade.
Trading Futures in Australia
Trading futures in Australia can be a great way to make money if you have a solid and consistent strategy. A strategy containing risk management techniques.
The futures markets offer unique flexibility to traders in Australia. Living in Australia provides some challenges when trying to access live events in the Northern hemisphere. We’re in a vastly different time zone to the majority of the markets, particularly the US.
If someone in Sydney, for example, wants to day trade stocks on the S&P500/Nasdaq, they’ll be up around midnight doing so. The advantage of trading futures in Australia is you can trade the stock index itself during any major session. This means you can trade the Asian, European, and US sessions.
If you can only trade in the early morning, you could trade the U.S close. If you can only trade the afternoon, you could try the European open. There is a lot more option for what time of day you can trade futures in Australia compared to stocks/options.
When do Aussies Trade Futures?
As mentioned, there are a number of times available for trading futures in Australia. Futures traders tend to stick to trading the first hour or two of a major session, or the last one or two hours.
Here is a list of the times that we run our live trading room (Brisbane Local)
U.S Close: 4:45 a.m. to 7:00 a.m. Asia Open: 9:45 a.m. to 12:00 p.m. Euro Open: 5:45 p.m. to 7:30 p.m. U.S. Pre-market: 10:45 a.m. to 1:00 a.m.
*Times vary for daylight savings local to these markets
As you can see, there is a lot of variety when it comes to when you can trade futures.
Best Markets for Futures Day Trading
Finding the best markets for futures trading depends a lot on what you are looking for in a market, and how you trade. Some things to consider: when you’re available to trade, what the margin sizes are, and the volatility you’re happy to trade in.
Some of the better markets to trade are those that are the most liquid. Liquid markets allow quick entry and exit, more opportunities, and provide more price movement.
The best futures market for you to day trade will be a balance of what works best for you. Try trading a few markets on a simulated account and find one that fits, then concentrate on that market.
Some of the major markets to consider might be:
Volume and Value
E-mini S&P 500, E-mini NASDAQ-100, Micro E-minis, E-mini Russell 2000
AVG Daily Volume 8.1 million AVG Daily Notional Value 1.1 trillion
AVG Daily Volume 2.8 million AVG Daily Notional Value 217.4 trillion
Corn, Soybeans, Chicago SRW, Wheat, Live Cattle
AVG Daily Volume 1.9 million AVG Daily Notional Value 90.4 billion
Eurodollar 10-Year T-Note SOFR Cash Treasuries and Bonds
AVG Daily Volume 14.9 million AVG Daily Notional Value 9.4 trillion
How to Trade Futures in Australia
Tips For How to Trade Futures in Australia:
Do your homework
Get a good broker
Have a trading strategy
Have a trading plan
Use a trading journal
Learn from a professional
1. Do your homework
Before you start trading futures, it’s important to understand the basics of the market. This includes understanding the contracts, the options available, and how the markets work.
2. Get a good broker
To make money trading futures you need to find a good broker. A good broker will provide a direct connection to the exchange. They should have a lot of experience trading futures, and will be able to help you make informed decisions.
3. Have a trading strategy
Your strategy will allow you to find high-probability trades. A trading strategy will have set-ups or trading patterns to help identify good trades.
Not having a trading strategy is a big reason why new traders fail. You need to have a set of rules and a plan for every trade that you place. Not having a strategy often leads to spur of the moment decisions that can be costly. Your strategy will also help you understand what a good opportunity looks like. It will also tell you what a bad trade might look like.
4. Have a trading plan
A trading plan will include your trading goals, and a measurable way in which you want to achieve them. This plan becomes your rules for trading, it will tell you how much you can risk in a trade. It will also tell you how many trades you can place, what your profit target is for the day, and how to manage open trades.
5. Use a trading journal
A trading journal is an important tool to use when trading futures. A journal can help you track your trades, performance, and help you stay disciplined. By keeping a journal, you can also develop a better understanding of your own trading style. This can improve your odds of success.
6. Stay disciplined
Stay disciplined when trading futures, don’t get carried away with your investment. You will need to learn to trade a strategy that allows you to find high-probability trades.
7. Learn from a professional
There’s nothing wrong with learning on your own, but learning how to trade with an academy provides many benefits. You’ll be able to learn a specific strategy, how to manage the risk, and the context of how to use that strategy.
Learning to trade with a professional educator provides support (at least we do) along the way to ensure that your trading is the best that it can be.
Tools You’ll Need to Get Started
There are a few tools and services that you will need to access the Futures markets and place trades. Here is what you will need:
A trading computer setup, either laptop or computer. You need to have a laptop or computer that is capable of running trading software. That will allow you to connect to the market and place trades. You won’t need a top-of-the-line machine; however, it should be robust enough to not lag or crash at the wrong time.
Many of our members choose to use a laptop as it provides mobility and flexibility for where they can trade. Others prefer to set up a desktop computer in a designated location (a trading den, if you will.)
A reliable internet connection Because the live markets can move quickly it is important to execute your trades quickly. It’s also important to have a reliable connection that won’t drop out and leave you stuck in a trade until you’re back online.
Broadband or cable internet are the most preferred connections for trading.
A Trading platform to connect to a market and execute trades you will need a special software called a trading platform. Trading platforms provide you the charts and drawing tools to help identify trades, and the functionality to place trades.
Our favourite trading platform is NinjaTrader and it is the platform that we and our members use.
A live connection and data feed You need a live connection to a market so that a trading platform can make the request to execute a trade. The data feed will provide information about price, and allow the platform to build charts.
Best Way to Learn Futures Trading
The best way to learn futures trading depends on how you best learn in general. But there are some guidelines that you can follow.
Learn How to Trade Futures From Someone Who:
Consistently Profitable Strategy
Strong Risk Management Techniques
Accreditation from ASIC or relevant body
Has Students Performing Well
1. has a consistently profitable strategy Most often, when learning how to trade, the goal is to be profitable. You need to follow an educator who is able to be profitable, and consistently so.
2. has strong risk management techniques Risk management is a huge part of trading. No trader is right all the time, it’s not possible, so you need to know what to do when you’re wrong.
3. is accredited by a governing financial body Anyone can sell an online course. An ASIC regulated educator must work in the best interests of the student. Anyone who is not regulated by ASIC (or relevant body) has little repercussion to wrong-doing.
4. has students who can also perform well in trading. The educator can be the best trader in the world, but if they can’t pass that skill on, it doesn’t matter. The trading strategy and techniques should be as transferrable to students as possible.
Learning to Trade From Books
Learning from a book is a good method if you are someone who learns best by reading. You can find many quality books on the subject. The downside to learning from a book is that there is no educator to provide support. There’s no-one to answer questions about something you didn’t understand.
Learning to Trade From Online Sources
There isn’t anything wrong with learning from online sources, per se, but be careful. There are no requirements to posting something on the internet, anyone can do it. If you choose to learn how to trade from online sources, make sure they are reliable.
Ensure you aren’t learning from too many sources; different strategies don’t always work together. Information is often provided out of context with little support provided.
Learning to Trade with an Academy
It is so important to invest in your education, with your time, money, and effort. While it’s possible to teach yourself, you’ll find your learning unstructured, and unsupported. You may end up with a Frankenstein’s Monster of different techniques and strategy.
It’s best to learn to trade with an educator / take a Day Trading Academy course that has a solid track record. You should find someone who provides a high level of support and guidance. There are many share trading courses online, choose a program that you feel confident that you could learn.
Practise in a Live Trading Room
Practice is important when learning how to trade. You need to practise on a simulated account, trading fictional money. This allows you to only risk your own money when you’re ready to open a live trading account.
Live day trading rooms are a good place to do this practise. You will be able to follow a professional trader and ask questions about the strategy. Watching someone perform a task is often a good way to learn.
Can Trading Futures in Australia be Profitable?
Yes, trading futures can be profitable. But you need to learn a trading strategy that allows you to find high-probability trades. You need to partner that with a strong risk management strategy.
You will need to learn trading psychology skills that allow you to be patient and avoid mistakes. Trading without emotion is very difficult to do, but as traders we need to limit emotion as much as possible.
To have a chance of being profitable, you’ll need 3 major things: A strategy that helps you find good trades A method for managing risk The right mindset
These 3 things combined provide you with the “trader’s edge”.
Trading Futures in Australia is becoming more and more popular. It’s appealing to retail traders because they can access a fair market that they can get in and out of quickly. The appeal also comes from being able to trade a smaller account. Futures traders can negate the restrictions in other forms of trading (No PDT rule).
Combining Day Trading with Futures gives you the opportunity to create an income. You can do this on a daily basis (when the markets are open). It can provide either a second source of income or even a full-time income working fewer hours.
If you are looking to begin trading Futures, make sure you prepare yourself. A good place to start is with one of our courses in futures trading for beginners.
It’s always best to create a simulation account where you can practice strategies that you’ve learnt. Never trade your own money until you have proven to yourself that you can be profitable. We call this go slow to go fast and it’s the best way to approach any form of trading.