Jun 27 2011
How Timeframe Affects Your Futures Trading System: Day-Trading Timeframe
When choosing a futures trading system, choosing a timeframe is very important. Consider the three main timeframes: long-term, swing trading, and day trading systems. Now let’s 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.
Not holding positions overnight is a boon to the day trader because this means lower margin rates too, since most futures brokers give day trading margin rates that are less than the exchange minimums. This extend a futures trader’s leverage, and allows him to reap more profit (and risk) from a given account size.
Day trading systems attract many futures traders because of this one unique feature. Knowing that no matter how the day’s trading goes, 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.
The main benefit to trading a day-trading system is limiting risk. Because the system doesn’t hold positions overnight, the futures trader has removed the possibility of overnight prices could cost him money. This not only lesses risk on a per trade basis, but on a portfolio basis as well. And reducing risk is very important to a futures trader’s ability to survive to trade another day.
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 when using a day trading system, the system will exit every trade, even great trades, at the end of the day no matter what.
Another downside to day trading systems is that they often have lower average trade net profit. Unfortunately, slippage and commissions are magnified in day trading systems versus swing or long-term systems. For this reason, it is very important that you choose a futures trading system that has already factored in commissions and provided for a generous amount of slippage.
If the day trading system can deal with the previously mentioned issues robustly, then you have quite a wonderful way to trade futures. A solid, well-constructed day trading futures system can capture large profits in a small amount of time. This is because the futures markets allow for increased amounts of leverage, which allows futures traders to turn even small price movements into large gains.
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 commissions, there generally are only one or 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.
It is best to look for systems that have already factored in slippage and commissions 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 meets those criteria, then just apply to it your money management skills, and you’re on your way to trading profits!
In need of futures trading systems? Midas Trading Systems provides dozens of futures trading systems available.
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