Wednesday, June 15, 2011

Profiting In Futures With Trading Systems: Day-Trading Timeframe

When choosing a futures trading system, choosing a timeframe is very important. The choice lies mainly between three main categories: swing trading, day-trading, and long-term systems. We'll review day trading systems and the pros and cons of trading one.

There's one thing that all day trading systems have in common: they do not hold positions overnight. This means that before the end of the closing bell for the regular session, any open positions will be closed. The closing bell occurs at different times for different markets, but it generally occurs around 3:30pm Central time.

Not holding positions overnight is a boon to the day trader because this means lower margin rates too, as most futures brokers allow day trading margin rates that are lower than the exchange minimums. This benefit leads to an increase in a futures trader's leverage, and this increased leverage allows him to trade more contracts from a given account size.

Day trading systems attract many futures traders because they close all positions at the end of the day. The idea that no matter how the day's trading goes, your position will be flat ("flat" refers to not having any position, long or short) at the end of the day compels many futures traders to choose these kind of systems.

The main benefit to trading a day-trading system is limiting risk. Because the system holds no positions overnight, the futures trader has removed the possibility of overnight prices going against him. This not only lesses risk on a per trade basis, but on a portfolio basis as well. And reducing risk is essential to a futures trader's ability to stay in the game for the long haul and be profitable.

This limitation of risk, does come at a cost. The cost is that trades that could have been greatly profitable are usually closed out prematurely. Depending on the market being traded, good trades can take days to develop, and if you're using a day trading system, the system will always exit every trade at the end of the day, regardless of how well it is doing.

Another fault with day trading systems is that they usually profit less per trade than swing or long-term systems. This means that the effects of commissions and slippage are magnified in day trading systems versus swing or long-term systems. For this reason, it is crucial that you choose a futures trading system that has already factored in commissions and provided for a generous amount of slippage.

If the day trading system can deal with the previously mentioned issues robustly, then you have quite a wonderful way to trade futures. A solid, well-constructed day trading futures system can give large profits in a small amount of time. The reason why is that the futures markets allow for large amounts of leverage, which allows futures traders to turn even small price movements into large profits.

Depending on the system, it may enter the market only once a month or once a week, or may trade many times per day. Most professionals agree that, unless you have access to high-tech algorithmic infrastructure that can execute trades in mere milliseconds, you'll be doing yourself a favor by avoiding systems that trade more than a few times in a day. This is true because after accounting for commissions and slippage, there generally are only one or a few good trades each day in any given market. If we try to make trades up when they aren't there, we usually get hurt.

Your best bet is to look for systems that have already factored in commissions and slippage in their results, and systems that trade less than 3 times per day (a few times a week is perfect) on average. Once you find a system that's a match, then apply your money management skills, and you're on your way to trading profits!

Looking for futures trading systems? Midas Trading Systems offers dozens of futures trading systems available.

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