Futures Market Questions From the Classroom

Don Dawson

At Online Trading Academy we encourage our students to ask questions.  Not only does this promote good community in the classroom, but it gets other students to start thinking out of the box and asking their own questions.  As an instructor I have seen on numerous occasions where a student actually understood a comment I made after another student rephrased my comment in a question.  As adults we all learn at different levels, some students need more visual, extra explanations, hands on or all of the above before we actually “get it.”

Our goal is to make you a better Futures trader by giving you and showing you how to use tools to plan your trades, manage your risk and understand the fundamentals (market mechanics) behind the markets you are trading.  We are not going to promise you success because that is up to “YOU.”  Each trader must take the knowledge they learn and come up with a trading plan that is personally tailored for them.  After a student finishes our classroom training they will each have a certified Education Counselor to help guide them.  The Counselor will review students’ trading plans to assure they are on the right path, this will help hold each student accountable for their continued success. Trading requires a lot of effort to become successful and consistently profitable. Counselors will also better know the students best path for continuing education after the classroom.  Our Extended Learning Track (XLT) program offers daily live or recorded sessions where a student can participate with excellent instructors showing proper ways of trading Futures markets and how you too can create a trading plan and do the same.

This is known as a process, not overnight success.  I strongly encourage students to be patient when it comes to learning to trade.  Too many times we see students trying to take too many classes back to back.  The human mind can only retain so much information.  To have a chance of becoming a successful trader you will need to pace yourself.  Take a class and go home to practice on a simulator what you learned for a few months.  When you feel like you have a good understanding of what you learned then look to take the other asset classes.  If you feel like you do not totally understand what you learned from the last class then take the free retake of that class again.  Where else can you get such an exceptional offer of retaking classes for free for life? Take advantage of it!

Trading Question

In this article I thought we would address two questions that seemed to come up multiple times in 2013:

Should I day trade or swing trade the Futures markets?

This question comes up frequently and for good reason.  Many traders feel that day trading is less risky.  They feel that swing trading involves too much risk because of holding overnight positions.  While there is some truth to these views the end result will be up to the trader themselves.

Day trading offers many opportunities to be in the market during the trading day.   Usually a day trader who sits in front of the screen all day will use very small timeframe charts to identify their supply/demand levels from.  The small timeframes sometimes allows the trader to have less capital risk for a protective stop.

A couple of things come to my mind when a trader decides to day trade.  First: is they sometimes forget to take into consideration the longer term trend and where the current price is in relation to being overextended in a price direction up or down.  Without knowing where you are in the bigger picture you may find yourself selling too close to a recent overextended down trend low.  The corrections after an overextended move tend to be more volatile and the price usually retraces much further than a normal correction.

The second thing is the emotion that comes into play when sitting in front of the screen trading.  Even the best trading plan can be ignored when the emotions of price action take over your trading.  Have you ever had a losing trade and wanted to get back into the market so bad to get your money back?  Do you remember how you “fabricated” a trade and did not wait for a setup according to your trading plan?  This happens all the time to screen traders, sometimes even to professionals.  Maybe you were short the market and got stopped out on a big green candle going against your position.  Your emotions told you to just buy at the market to reverse your position.  You may have done this and as soon as you went long the market quit going up.

Swing trading allows the trader to do their market analysis prior to price coming near their entry point and this helps to reduce the emotional side of trading.  Day traders can actually do this too; it is called Intra-Day swing trading.  Both of these styles allow a trader to set their trades up and walk away from the screen.  They are well aware that trading works off probabilities and that their trading style has an edge that puts the odds more in their favor.  Of course there will be losses, but a good trader always has much smaller losses than winners.  The good thing about this style of set and forget trading is it takes the destructive emotional trading away by the trader not always being in front of the screen.  This style also allows traders to actually enjoy life since they can leave their office and be with friends and/or family.  Most of us became traders because we did not want to be stuck in an office all day. As a day trader, trading from the screen all day, you actually are doing just what you are trying to escape.

How do I know which Futures markets to trade?

Originally Futures markets began as a physical Commodity Futures market.  Then in the early 1980’s Financial Futures came along.  Today they are both popular products to trade.  But which one fits your personality or trading style?

Electronic Futures trading has made Futures trading more accessible than at any time in past history.  No longer are the days where you have to call the trading floor or your broker to place your orders.  Commissions are inexpensive, statements are emailed to you – no more snail mail, order execution is more transparent and there is a more level playing field for market participants.  These features are a great advantage to anybody wishing to dip their toes into the highly leveraged world of Futures trading.

But is there a difference between trading Financial or Physical Commodity Futures?  The answer is – Yes!  I suggest to students when they first come into the Futures arena to focus on trading the Financial Futures first.  After gaining experience with the Financial Futures then and only then, they can gravitate towards the Physical Commodity Futures.  Remember I mentioned “Process” earlier in this article?  You had better know what you are doing before you go trading Physical Commodity markets.

Financial Futures are more of a lateral move from the Equity markets for traders.  New Futures traders usually have had some experience in the Equity markets and know what drives the prices of Stocks, what economic reports move the Stock market, know which holidays affect the markets and other related factors.  Financial Futures are much more forgiving to trade than some of the Physical Commodity Futures contracts for the following reasons:

  1. Financial Futures contracts truly trade almost 24 hours per day Sunday through Friday.  Many Physical Commodity markets only trade 10 to 17 hours per day.  This could result in gap moves against our positions on a daily basis.  While the biggest gap risk with Financial Futures is the Sunday night open after being closed since Friday afternoon.
  2. The Extended Trading Hours (ETH) volume is significantly lower in the Physical Commodity markets than the Financial Futures.  This will cause a trader to have lower quality supply/demand levels because the charts will have more dots and gaps during the ETH session.  Also, with lower ETH session volume this leads to more slippage when your stops are hit.  Financial Futures usually have more volume during the ETH session and the chart candles are more full bodied with fewer gapping candles.
  3. Physical Commodity Futures can have Limit Up or Down moves during the session.  These can or could result in a trader being stuck in a trade with no way to get out until the market is not Limit Up or Down during another session.  Results could be losing much more money than you had planned.  Some Financial Futures have Circuit Breakers instead of Limit Moves, which are not as drastic.
  4. Financial Futures all expire during the same Months of the year (March, June, September and December) while Physical Commodity Futures expire during many other months through the year.  Commodity Futures traders must be more aware of when a contract expires or risk having a Commodity delivered to them.
  5. Financial Futures consist of: Stock Index Futures, Interest Rate Futures, and Currency Futures.
  6. Most brokerage firms offer reduced day trade margins for Financial Futures, but few will offer this reduced margin for Physical Commodity Futures.

As we start this New Year I hope each of you have completed your written trading plans before committing any capital to the markets. Just for the record, I have never met a trader who lasted more than 6 months in the Futures market without a trading plan.

I look forward to seeing each of you in our Futures classes and getting a chance to answer your questions you may have about trading the Futures markets.

“It’s always too early to quit!” Norman Vincent Peale

Don Dawson

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.