Why Day Trade Futures Indexes and Not Stocks?

I began my trading career day trading stocks, mostly the blue chip variety. And there is nothing wrong with day trading stocks, though generally speaking individual stocks do not have the volatility that many day traders crave. To be sure, stock trading is a longer term proposition and are less prone to to dramatic movement. For my money, I generally buy stocks to either swing trade, or hold onto for longer term growth. On the other hand, you can often find individual stocks that oscillate widely on a daily basis and are perfect for day trading, but these instances are rare. I can recall years ago that Jupiter Systems was a great day trading stock, as I haven’t traded it in years, I do not know the current status of this issue.

On the other hand, the financial requirement for trading index futures contracts lends itself favorably to the day trader. The key element is margin, in this case. When trading stocks, Regulation T becomes a prime issue, and Regulation T requires you to put up 50% of the contract value in order to trade the stock. If you are trading GOOGLE in round lots, say a hundred shares, you will be forced to pony up a significant amount of cash in order to trade this stock.

Futures contracts are another matter all together. Most futures contracts, specifically the emini variety, were specifically designed for day traders. You can usually find brokerages that offer margin requirements in the range of $500 per contract. Each point on, lets use the ES emini contract, is worth $50 dollars, and lets assume the ES index is trading in the 1000 dollar range. Simple math tells us that you are controlling nearly $50,000 dollars with a paltry 500 margin requirement. In trading, leverage is kind, when used properly.

Once simple consideration should always be forefront in your mind, though. Leverage will maximize you returns and maximize you losses. A skillful trader will manage his money effectively, never overextending himself/herself in a given trade. In my trading, I never like to risk more than 10% of my futures account value on a given trade. Some traders even lower this amount to no more than 5% on given trade. This is, of course, a personal preference but the point is a simple one; because of the high degree of leverage in futures contracts, money management is of utmost importance.

For example: Lets say you have established a $5000 futures trading account. Generally speaking your futures broker will let you trade up to 5 contracts on this account. It should be noted that most futures brokerages will not let you trade up to your account limit, and most set trading restriction at about 50% of your account value. Anyway, there is no way that you should even consider trading your maximum level (5 contracts) on a given trade. On a $5000 account I would be hesitant to trade more than I contract, maybe 2 if I felt very comfortable with the trade. Overextending your trading account is a great way to end up broke. Be judicious in the number of contracts you trade, and always use stops to make sure you don’t get caught in a run away trade in the wrong direction.

Leverage in futures contracts can be a very useful tool to increase your account balance, and your potential to make money is far greater in a futures account than day trading a stock account. But managing a futures account takes a high degree of skill and self discipline. There is a constant compulsion to overtrade your account, or trade an excessive number of contracts relative to your account size that has to managed with skill. Further, it is your responsibility to exercise proper money management when trading futures contracts.

In summary, we have taken a close look at day trading stocks and futures contracts. Stocks can be suitable investment vehicles to day trade, but because of the leverage requirements in futures contracts they are generally a better choice, but only if you are able to responsibly implement money management techniques that don’t expose you to excessive risk. Money management is one of the most challenging aspects of trading, and one of the most difficult to master. I suggested never risking more than 10% of your account on a given trade.

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