Lessons from the Pros

Featured Article

Does Futures Trading Meet Your Objectives?

Like most things in life, if one wants to accomplish anything worthwhile, the starting point has to be knowing exactly what it is that you want to get done. In trading it’s no different. I see too many traders launch into this endeavor without any clear-cut goals or plan on how to achieve those targets. So it is incumbent for a trader to delineate their objectives when first starting out.

Man Hand writing What Is Your Purpose? with black marker.

For example, if a trader’s goal is to generate short-term income there are three questions they must answer:

1. What asset class best suits that goal?

2. What time of the trading session is optimal for extracting profits from the market.

3. What time frames will be most effective in achieving that goal?

Let’s delve into the first question: there are of course various asset classes that a trader can engage in, but which one has the characteristics needed to help a trader better get to their destination? For short-term income, there are stocks, options and futures  I believe the futures markets fit that bill.

For one, futures have a smaller barrier to participating, meaning, unlike the stock market that requires that a trader maintain a minimum account balance of at least $25,000 for a pattern day trading account. That’s not the case in the futures markets. Most futures brokers require much less capital to open an account which opens up the potential for a larger swath of the trading public.

Another attractive attribute is the leverage that futures provide. In this market, a trader controls large amounts of an underlying asset such as Gold, Oil or the S&P 500 Stock Index. This is done by requiring a trader to deposit only a small portion of the value of that asset.  If done properly (with low risk and high probability) This allows traders to garner rates of returns that are amplified versus not using any leverage at all.

The trading hours for most futures contracts are 23 hours daily starting on Sunday and ending on Friday. The benefit for traders in this is the flexibility that these hours provide. This is especially true in the transition phase where a would-be trader is still earning an income from a traditional business rather than from trading full-time.

The optimal times (when opportunity has the highest probability) however, is around when major market centers such as New York or London are opening and are closing. That’s because this is when liquidity (institutional participation) is at its peak and thus opportunity is more abundant.

Free Trading WorkshopLastly, since the objective is to generate income from trading Futures contracts the holding period for these trades is short-term in nature, usually intraday.  Since this is the case, the timeframes used on a price chart to find opportunities is also short-term in nature. Ideally, trades could be taken from charts with 15 to 5 minute time frames.

In summary, planning clear objectives and putting them together with a timeline is part of a winning strategy. A big part of that is using the right tools and asset classes. The futures markets are a great fit for short term income. I hope this will help some readers move forward in a positive, constructive manner .

Until next time, I hope everyone has a great week.

 


DISCLAIMER 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.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.