How Timeframe Affects Your Futures Trading System: Day-Trading Timeframe
by Dean Steele
When choosing a futures trading system, choosing a timeframe is very important. You can break down timeframe into three main branches: day-trading, swing trading, and long-term systems. This article will explore day trading systems and the pros and cons of trading one.
Day trading futures trading systems all have one thing 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 end of the regular trading session (varies by market) is marked by the closing bell, and it generally occurs around 3:30pm Central time. This means lower margin rates too, since most futures brokers allow day trading margin rates that are lower than the exchange minimums. This extend a trader's leverage, and allows him to reap more profit (and risk) from a given account size.
Day trading systems are very attractive to many investors because they close all positions at the end of the day. Knowing that no matter what trades are made throughout the day 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 over other choices.
The main benefit to trading a day-trading system is limiting risk. Because the system holds no positions overnight, the trader has removed the possibility that overnight prices could cost him money. This not only reduces 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.
Unfortunately, when you limit risk in this way, you have to pay for it somehow. The cost is that trades that could have been greatly profitable are usually closed out prematurely. It varies by market, but good trades can take days to develop, and if you're using a day trading system, the system will exit every trade, even great trades, at the end of the day no matter what.
Another fault with day trading systems is that they usually profit less per trade than swing or long-term systems. Unfortunately, commissions and slippage are magnified in day trading systems versus swing or long-term systems.
Because of this it is vital that you choose a futures trading system that has already accounted for commissions and provided for a generous amount of slippage.
If you can find a day trading system that has adequately handed the previously mentioned problems then you might just have found a a wonderful way to trade futures. A robust, well-designed day trading futures system can capture large profits in short periods of time. The reason why is that the futures markets allow for large amounts of leverage, which allows investors to turn even small price movements into large profits.
Day trade systems 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're best off avoiding systems that trade more than a few times in a day. This is because after accounting for slippage and commssions, there generally just a few good trades in a 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 reaping the rewards!
Article Tags: Futures Trading, Futures Contracts, Spot Trades