If you have been looking at futures, you may have come across the term “futures day trading”. Wondering what that means? Day trading in future markets is highly speculative and highly risky, so we should start with that warning right away. Of course, if you’re familiar with trading, then you probably know that high-risk also means increased reward. There is a lot of money to be made in futures. However, if you are not careful, you could end up suffering from losses.
Understanding How Futures Work
So what exactly is futures day trading? Let’s take a moment to examine the term itself. Futures refer to a specific type of investment vehicle. The details are rather complex, so make sure you pay close attention. You can think of a future’s contract as a sort of buy/sell contract that obligates buyers and sellers to complete a certain action at a specified time, and with predetermined prices.
Silver Futures Example
That’s quite a mouth full, isn’t it? This concept is most easily understood with an example. Let’s say you believe that silver prices are going to go up over the coming months. Looking at silver futures, however, you see that many sellers actually have a negative outlook. Silver is currently selling for $20 dollars per ounce. However, a future for delivery of 100 oz. of silver is selling for only $1,800 dollars with an expiration date for 3 months from now.
This means that you can buy a futures contract for the delivery of 100 oz of silver that will be delivered in 3 months. (People who buy and sell futures contracts rarely take delivery of the goods, but more on that later). While you believe silver prices go up, if you buy the future, you can actually buy the silver for less money.
Let’s say you do buy the silver and a few weeks later silver prices sky rocket. Silver is suddenly selling for $26 dollars an ounce, and futures look even better, with silver futures with 60 day expiration dates selling for $32 dollars an ounce. At this point you’d be able to sell that silver future you bought for a large premium (probably around $32 dollars).
You would gain all of the extra money, or $14 dollars per ounce. You could also let the future expire. In which case you would either receive delivery of the 100 oz of silver, or more likely, the seller of the future would settle with you in cash. When you settle in cash, the seller would pay you the current selling price of silver. So if silver prices rose to $33 dollars, the seller would give you $15 dollars in profit.
Understanding How Day Trading Works
So what about the second part of the term? Day trading refers to a particular investment strategy that centers around making a large number of short-term trades within a given trading day. (Hence why it’s called “day” trading). Day traders sell off all over their investments by the end of the day and do not hold investments overnight.
This type of traders generally make profits by working with highly volatile investments, or through the additive value of small movements within a given asset. For example, an investor might choose to invest in “penny stocks”, which are highly risky investments in companies that are generally on the verge of bankruptcy, but could still potentially recover and gain huge amounts of value (Apple, for example, was once a high risk investment but staged a huge turn around).
Another way to make money is through the additive value of small movements in markets. Let’s say you buy and sell platinum futures within a given day. If platinum futures drop by two percent in the morning and you buy them, but then said futures rise four percent by the end of the day, you can make a lot of money off of those relatively small movements. Futures day trading is thus an investment strategy that focuses on short term gains instead of long term gains.