There are many different ways to approach trading futures online and numerous factors to consider. This includes selecting a broker, trading platform, and risk management strategy…just to name a few. Below are some questions to ask yourself and guidelines to follow to help you through this process:
1. What Futures Contract Should I Trade?
One important factor to consider when choosing a futures contract to trade is liquidity. The more liquid a contract, the smaller the difference will between the ‘bid price’ and the ‘ask price’. This difference is commonly referred to as the ‘spread’.
To help clarify:
- Bid Price: the value of a futures contract at which you can exit a position
- Ask Price: the value of a futures contract at which you can enter a position
- Spread – the difference in price between the bid and the ask
More liquid contracts have a ‘tighter’ spread making it less expensive to enter and exit the contract.
Examples of futures contracts with high liquidity include:
- S&P 500 Index futures – trading symbol (ES)
- Dow Jones Industrial Average futures – trading symbol (YM)
- Nasdaq Index futures – trading symbol (NQ)
Another key factor to consider is contract volatility. Contracts that are highly volatile experience greater price fluctuation and more active trading volume. Increased contract volatility can lead to both greater gains or losses. As a result, highly volatile contracts can be risky for new traders. For many, starting with contracts that are less volatile can reduce the risk that comes with rapid market moves.
Examples of futures contracts with traditionally high volatility include commodities contracts traded on the NYMEX such as:
- WTI Crude Oil (CL)
- Gasoline (RB)
- Natural Gas (NG)
Examples of futures contracts with traditionally lower volatility include indexes such as:
- Nasdaq (NQ)
- Dow Jones Industrial Average (YM)
2. Which Online Futures Broker Should I Trade With?
When getting started, a trading simulator can be invaluable for those new to the markets. The market rewards traders for their disciplined, planned and skillful trading. Unlimited access to a free trade simulator provides a risk-free way to practice and become comfortable with your trading software (more on that later!). Make sure your futures broker provides a free-to-use simulator so you can prepare at your own pace.
In addition to trading in ‘SIM’, many brokers also provide live market data trials which allow you to practice trade using real-time data. This step is critical to help you prepare to enter the live markets. Ensure that the broker provides both a free simulator but also free live market data for you to take advantage of.
When you’re ready for live trading, some key items to review include:
- Commissions are often presented as a ‘per side’ cost. Determine what the ‘round-turn’ rate will be for an actual commission estimate.
- Every broker will pass along standard fees charged the exchange. These ‘Exchange Fees’ vary based on the contract you are trading and will be consistent broker to broker.
- However, some brokers will include additional fees that may show up on your statements inflating your costs. For example, technology fees, clearing fees, etc. These fees are determined by each individual broker and are often a spot where hidden markups can be worked in. Be sure to get a quote on the “All-In Round Turn” rate for a price reflective of your total costs.
- What are the intraday margins associated to the contracts you will be trading?
3. How Should I Select a Futures Trading Platform?
If you are new to trading, you’ll want to find a trading platform that caters to both new traders like yourself but also supports more advanced trading functionality that you can take advantage of as your trading skill grows.
Some starting functionality to consider includes:
- There are many ways to submit an order to the market. Using a Depth of Market (DOM) interface is a very common approach. Many traders also choose to enter trades directly from a chart. Flexibility with multiple order options through your platform will help you identify your preferred approach.
- For many traders, everything starts with the charts. Clean and simple charts can be crucial for new traders as they help you visualize the markets and target your entries and exits.
Data Connection Options
- While brokers provide live trading data, many traders also choose to add an additional data vendor to access a wider market data set, have a back-up data source, etc. If this is important to you, be sure to explore the additional connectivity options available.
With all this functionality to explore, education and training can make all the difference in how fast you learn your platform. Find out what support resources are available for your trading platform. Do they hold live webinars? Have training videos? What about a support forum?
4. How do I Develop a Futures Trading Strategy?
As a starting point, here are some basic concepts regarding order entry and market exits:
Entering the Market
- ‘Going Long’: buying a futures contract with the goal of profiting once the contract gains in value
- ‘Going Short’: selling a futures contract with the goal of profiting once the value of the contract decreases in value
- ‘Stop Loss’: setting a price at which the trading platform will liquidate or exit your position
So, how do you decide when to enter the market and when to exit? For many traders, Support and Resistance levels provide a solid starting point.
By looking at historical market activity and price movements (often referred to as “Price Action’), you can start to get a sense of the range of contract movement between Support and Resistance levels.
Once a contract’s price convincingly surpasses either a support or resistance level, this could be considered an opportunity to either ‘go long’ or ‘go short’.
In addition to Support and Resistance levels, trading indicators also provide another avenue to help you identify possible entry and exit points.
Depending on your trading platform, you will have numerous trading indicators to test and identify those that you prefer. Bollinger Bands®, and Relative Strength Index (RSI) are just two examples of commonly used indicators.
As you review various contracts, support and resistance and your indicator options, a key point to consider is your tolerance for market fluctuation. Your futures trading strategy should be customized to fit your personality and reflect your tolerance for these market moves and the associated risk.
Always remember that past performance in not indicative of future results. Only funds that can be lost without jeopardizing your financial security or lifestyle should be used for trading. The importance of ensuring that your trading strategy reflects your risk preferences cannot be overstated.
Ready to get started with NinjaTrader’s free trading simulator & live market data? Download Now and register for a free futures data trial to start exploring the markets!