Futures trading is among the most leveraged and potentially profitable financial activities today. It allows traders to quickly create their trading accounts with only a small amount of capital at their disposal. However, if you take futures trading lightly, you could also wipe out your trading account in a matter of days. Therefore, it is crucial to your trading success that you educate yourself diligently in futures trading and only trade with a solid and proven trading strategy.
If you are new to futures trading, it can be especially difficult to decide WHICH contracts to actually trade. There are many options! Probably the best approach would be to start with the most popular commodities, until you have a better idea of which contracts are the best fit for you and your trades.
The more you know about the basics of futures contracts and commodities like this, the better your chances of trading success. With any type of online trading, there are a number of factors that you need to consider. Here are four of those factors, along with an assessment of how futures trading is measured:
1.) Capital requirements
To trade a futures contract, you must deposit an initial investment into your futures trading account. Currently, brokers require a minimum of $5,000, although some brokers are willing to open an account with as little as $2,000.
2.) Leverage
Leverage depends on the futures contract you are trading and the value of the contract. Each contract requires an initial margin. Here are some examples of the most popular contracts (as of January 2008):
E-mini S&P: As low as $500 to trade a $75,000 contract
(Leverage 1:150)
E-mini NQ – As low as $500 to negotiate a $45,000 contract
(Leverage 1:90)
E-mini Gold – As low as $400 to negotiate a $27,000 contract
(Leverage 1:67.5)
3.) Liquidity
Again, liquidity depends on the futures contract you are trading. Here are some numbers:
E-mini S&P: around 2,500,000 contracts/day
E-mini NQ: around 500,000 contracts/day
Euro Currency: around 200,000 contract/day
As you can see, liquidity varies and therefore you MUST check the volume of the futures market you plan to trade.
4.) Volatility
You will find decent volatility in the futures markets. The high leverage will allow you to make decent profits, even if the markets move only a few points. Here are some average daily movements:
E-mini S&P: between 1% and 3% per day
E-mini NQ: between 1% and 2.5% per day
E-mini Gold: between 1% and 2.5% per day
Euro currency: between 0.5% and 1.5% per day
Keep in mind that these movements represent approximately $500-$1,500 per day for each contract traded.
Conclusion:
The futures markets can be very liquid, and capital requirements are as low as $2,000. The leverage is at least 1:50 and there is decent volatility.
Futures markets are regulated and the spread is usually 1 tick (minimum movement of the contract). Commissions are usually less than $5 per transaction. It is not surprising that many day traders choose the futures market for their trading activities.