Futures markets lend themselves to short term trading, as the high leverage and volatility allow for substantial profit potential on an intra-day basis. However, not all futures are appropriate for very short term trading. There are other considerations as well. A short term trader needs to be able to get in and out of the market quickly, with minimal slippage. Slippage is the cost of trading due to the difference between the bid and ask prices.
In order to increase your odds of success as a short term trader, you should consider the following:
1) Trade the Electronic Markets
Trading on one of the electronic markets such allows for better transparency of pricing, as accurate bids and offers are reported, which is not always the case with markets that are still traded in the pits. As well, fills are reported immediately, so you always know exactly what positions you are holding. Pit traded markets can sometimes be slow with their reporting, and in heavy trading orders can sometimes receive bad fills. This would rule out cattle and hogs for example.
2) Trade Only those Futures with a Large Open Interest
In order to ensure good liquidity, trade the contracts with the largest open interest. Some futures, such as pork bellies as an example, do not have a large open interest compared to other futures. This means prices can be very volatile even with a small trading volume, and they can be difficult to get in and out of quickly with minimal slippage.
Look for futures with a large open interest, and then seek the contract month with the largest interest. Normally the nearest month or spot month will start to show declining open interest as traders close out or roll over their position into a farther out month. Spot months for some months also have increased or no limits, so they can be much riskier. The best bet is very often one month out past the spot month.
In any case, short term traders should not be trading in the deferred month contracts.
In summary then, a viable short term trading vehicle should exhibit:
- Large open interest
- High trading volume
- Small bid-offer spread
- Electronic trading ability
- Favourable margin rates
- Volatility sufficient to potentially produce your target profits on an intra-day or short term basis
For speculators, there are many contracts that satisfy the above conditions. Most of the financials, energies, and grains can be successfully daytraded. The e-mini contracts are also very popular as they are smaller in size and require less margin - perfect for the rookie trader.
If you are going to daytrade, it is a good idea to concentrate on only one or two markets that you can become intimately familiar with. Any more than two and you are spreading your attention too thin.
Successful short term trading is not easy, but it can be done. It does require time, effort, and discipline. If you manage to become successful though, the rewards for your efforts can be substantial.
Bryan Moffitt is the owner of Futures Research Corp. - a company that provides traders with valuable analysis and research of the futures markets. Specializing in seasonal and historical analysis. To improve your odds for success in the markets visit http://www.FuturesResearchCorp.com