Trading Futures For The Short Term

When one thinks of trading futures contracts, the automatic assumption is that the trading will take place over the medium to long term – that is, it is assumed that the speculation on the price movement of the underlying asset adopts an outlook that prices will either rise or fall over time. Even the name, ‘futures trading’ conjures images of trading on future value, which is often taken to mean at least a period of months, rather than days.

While futures trading is no doubt used for speculation over a matter of months, it can also be put to use as a tool in much shorter-term transactions, allowing traders to capitalise on the advantages of futures without having to put in the time and effort associated with predicting longer term positions or tying up their capital for lengthy periods of time.

In fact, there are a variety of trading strategies deployed by futures traders that are specifically designed for short-term applications, chasing more frequent, shallower profits to compensate from the larger gains that can be felt over longer time periods.

Futures Day Trading

Trading futures on a day trading basis is not uncommon, and in fact as an instrument futures are often more suited to trading commodities and certain types of asset class on an ultra short-term basis than many of their more traditional counterparts.

Day trading, in a nutshell, is the process of trading over the course of and within the hours of a single trading day, although the strategy isn’t so rigid as to totally prevent traders from rolling overnight if they so wish. In effect, day trading is just trading on a particularly short-term basis, with a view to making a larger number of smaller gains.

Within the realms of day trading are a number of more specific strategies that traders can implement, allowing them to use futures in a way that maximises their natural advantages as an instrument – for example, the leverage futures contracts afford. Here are but a few of the more common short term trading strategies you can implement, either as part of a wider day trading approach or for a short-to-short-medium term trading run.

Going Long

‘Going long’ is the process of backing a futures contract on an asset that will rise in price over the period of the investment. Generally, this is forecast on the basis of technical analysis, or information relating to the asset and the wider market, which can allow prices to flourish. For example, a company might release stronger results than the market had anticipated, or adverse weather conditions might affect the harvest of soft commodities – both of which will drive up the prices of the respective futures contracts over time. The theory holds that by spotting the likely trend before the rest of the world, or at least by acting swiftly to take a long position as the market starts to rise, the trader can profit from the percentage increase in price over the short trading period thanks to the significant leverage afforded by trading on margin.

Going Short

The antithesis of going long, going short can also be employed as a short term trading tactic to help futures traders capitalise on negative market movements. An equally popular strategy, some traders rely more heavily on identifying underlying weaknesses in assets and instruments, in order to benefit when market pricing collapses. This can be a useful strategy to leverage market panic or anxiety in the wake of some market or industry disaster, and can be equally (if not more) profitable than going long given the risk adversity of many of the larger investment players.

Scalping

Combining both a long and short outlook into short term trading, scalping allows traders to bank small profits on numerous transactions as soon as they arise, theoretically reducing the risk of exposure to the market. Scalpers aim to move in and out of positions quickly to bank small profits while dodging the potential of wayward market movements. As a short term trading strategy, it can be particularly effective when implemented with futures contracts, which enable traders to cash in on the leverage effect while minimising the physical time period during which their investments can go awry.

Futures trading is applicable as both a short and long term trading tool, with each outlook having its own particular strengths, depending on experience levels and risk appetite. While there are a variety of nuanced strategies built around the idea of trading short-term, having a command of both the objectives and discipline of short-term trading will stand you in good stead to profit from the futures markets, whatever challenges they may present.

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