Futures markets have several advantages over other markets, which make them the most popular day trading markets. Futures markets are available with a wide variety of underlying instruments, they have good range of price movement and liquidity, and some futures markets are available for day trading 24 hours per day.
Futures markets are offered with three main underlying instruments, including currencies such as the Euro to US Dollar exchange rate, stock indexes such as the Dow Jones and DAX, and commodities such as Gold, Silver, and Oil. There are also some individual stock futures, but these are not as popular as the currency, index, and commodities futures.
In general, futures markets are very actively traded markets, so there is usually a large daily price range, and large trading volume. Futures markets can also be day traded without any restrictions, which makes them preferable to US stocks which have day trading restrictions.
Futures markets trade futures contracts, and the smallest unit that can be traded is one contract. Each futures market has its own contract specifications, which detail the market parameters, such as the symbol, and the tick size. For example, the EUR futures market has the following contract specifications:
- Symbol (IB / Sierra Chart Format): EUR
- Expiration date (as of February 2007): March 16 2007
- Exchange: GLOBEX
- Currency: USD
- Multiplier / Contract value: $125,000
- Tick size / Minimum price change: 0.0001
- Tick value / Minimum price value: $12.50
The contract specifications are specified for one contract, so the tick value shown above is the tick value per contract. If a trade is made with more than one contract, then the tick value is increased accordingly. For example, a trade made on the EUR futures market with five contracts would have an equivalent tick value of 5 X $12.50 = $62.50, which would mean that for every 0.0001 change in price, the trade's profit or loss would change by $62.50.
Long and Short
Futures markets can be traded in both directions (up and down). If a trader expects the market to move upwards, they will make a long trade, which means that they will enter their trade by buying a contract, and exit their trade by selling a contract. Conversely, if a trader expects the market to move downwards, they will make a short trade, which means they will enter their trade by selling a contract, and exit their trade by buying a contract.
The same process applies to trades made with multiple contracts, except that there can be several separate entries and exits. For example, a trade made with five contracts might be entered at three different prices, and exited at one price, or entered at one price, and exited at five different prices. The only requirement is that the same number of contracts must be entered and exited in order for the trade to be completely exited and completed.
Being able to trade in both directions allows traders to make a profit regardless of which direction the market is moving, which is why day traders usually only care that a market is moving a large distance, rather than which direction it is moving.