|
 There is no shortage of day trading futures contracts to trade as there are numerous high quality exchanges offering very liquid derivative products for virtually all purposes. You have stock index futures trading, single stock futures, commodity futures, currency futures and many more. There was even talk of having futures for Random Access Memory (RAM) chips in order for memory manufacturers and computer hardware manufacturers to hedge their costs.
Understanding the Speculator's Role
 So with all this choice available, how can a newbie or intermediate level trader choose a futures contract for swing or day trading? Before we get into specifics, there is one thing that you as a speculator must absolutely understand. You must understand that when you earn handsome trading profits, you are in actual fact getting paid for taking risks which someone else did not want during the period of the swing or day trade! If you understand this, then your actions as a speculator will be consistent with that of a service provider who takes on calculated risks and not of a "leech" that tries to profit from other people's misfortunes. If you approach trading/speculating from this angle, rest assured that your journey to becoming a successful trader from a complete newcomer will be smooth.
Lets now get into some specifics on what you must consider when choosing a contract for swing or day trading futures.
Liquidity
 What is liquidity? Lets answer this with an example. If lets say
you buy 100 "widget" futures contracts from the futures pit and now when the
time comes for you to sell them, you cannot find ready buyers for 100
contracts at the current price but manage to find buyers for only 5 contracts.
The only possible way then for you to dispose of your 100 contracts is by
selling down to, lets say, 20 ticks below the prevailing price. In this case,
this contract is not liquid enough for the size you are trading as you suffer a
huge slippage when trying to square off your position. If however you only trade
1 or 2 contracts, then the contract may be liquid enough for your needs as your
trades are done at or near the prevailing price.
A good indicator of liquidity for a new trader is to see how much slippage
you incur when your "Market Stop Order" for the number of contracts that you
normally trade is triggered. If your slippage is huge, then you should consider
trading a more liquid contract. The E-mini S&P
500 futures contract traded on Globex is a good example of a very liquid
contract. For the front months, there is hardly any slippage
even on a few hundred contracts!
Institutional Participation
 If you refer back to the article Hedging using Index Futures Trading, you will appreciate why participation by big financial
institutions and money managers is important. Essentially, it all boils down to
these institutions buying insurance to protect their portfolio against any
unexpected event that may cause the market to go against their position. If the
unexpected event does not occur, these institutions will remove their hedges at
a loss, which is the cost of the so-called "insurance policy". The speculators
who took the opposite position would have then profited from this trade as they
would be paid for their services of taking risks on behalf of the
institutions.
If on the other hand, you have a market full of professionals specializing in day trading futures and
there is very little institutional participation, then the new or inexperienced
trader will continually have to ask "Who is the Sucker or BagHolder?" As the
popular poker saying goes, "If you are
wondering who the sucker is, it is probably you!"
Goto Choosing a Contract for Swing or Day Trading Futures - Part 2
|
