Last Updated on 3 April, 2021 by Samuelsson

Futures allow traders to speculate and gain from price movements of an underlying asset. One recurrent question among those who swing trade stocks and prospective futures traders is whether they can swing-trade futures, given that futures contracts seem to be more suitable for day trading and scalping. So, it makes sense to want to how you can use futures in swing trading?

Yes, you can use futures for swing trading if you understand the market and create a suitable trading plan for it. Depending on your capital and experience, it is very possible to swing-trade futures contracts, there are several ways to do that. Your ideas on how to make money swing trading futures evolve as you gain experience.

I guess you would want to know how to use futures in swing trading. So let’s dive in! In this post, we will discuss the following:

  • What futures contracts are
  • How they work
  • What swing trading is
  • How you can use futures contracts in swing trading
  • How to swing trade futures contracts
  • Strategies for swing trading futures contracts
  • How much capital you may need to swing trade futures

What are futures contracts?

A futures contract is an agreement to trade (buy or sell) an underlying asset at a future date for a predetermined price. It is a standardized derivative contract that is created and traded on a futures exchange. Here, the two parties agree that one party, the buyer, will purchase an underlying asset from the other party, the seller, at a later date and a price agreed on by the two parties.

If someone buys a futures contract, the person has an obligation to buy the underlying asset on the agreed date, while the seller has an obligation to sell the asset to the person on that day at the agreed price. However, both the buyer and the seller may be in the market for speculation — to profit from price movements — so they may not be interested in exchanging the underlying asset at the expiration of the contract and may not even hold the contract till expiry. Meanwhile, while the contract lasts, the buyer profits from an increase in the price of the underlying and losses from a price decline; the opposite is true for the seller — he losses if the underlying increases in price and gains if there is a price decline.

Futures contracts are traded across a variety of assets such as stocks, commodities, currency, interest rates among others. Traders need to take note of the asset’s trading hours. While some assets trade close to 24 hours a day, Monday to Friday, some have shorter trading sessions.

The price of futures contracts constantly fluctuates, with the value recorded as ticks. A tick can be referred to as the minimum price change a futures contract makes at any given moment during trading. A tick’s value may be 0.0001, 0.001, 0.1, 0.25, 0.5, 1 etc. which could be worth $1.25, $6.25, $10, $12.50, €10, €12.50 etc, depending on the underlying asset. Each tick represents a monetary gain or loss to the trader holding a futures contract. The size of the tick varies by the futures contract being traded. For example, while the E-mini S&P 500 (ES) moves in $0.25 increments, crude oil (CL) moves in $0.01 increments.

How futures contracts work

In the U.S., futures are regulated by the U.S. Commodity Futures Trading Commission. Futures contracts are settled in two ways: Mark-to-Market (MTM) settlement and final settlement. The former implies that the contract’s value is marked to its current market value while the latter happens on the last trading day of the futures contract

When a party buys a futures contract, it has an obligation to purchase the underlying asset at a later date and a predetermined price, while the counterparty (the seller) has an obligation to sell the underlying asset to the buyer on the agreed date and at the agreed price.

Thus, as the futures price changes, the parties gain or lose money. At the end of each trading day, the clearinghouse determines the average of the final futures trades of the day and designates that price as the settlement price. All contracts are then said to be marked to the settlement price.

For example, if the buyer purchases a futures contract at a futures price of $100,000 and, by the end of the day, the price makes a 1% gain ($1,000), the buyer’s account would be credited with $1,000, with the money coming from the account of the seller (the seller losses $1,000). Conversely, if the futures price of the contract decreases, the seller gains money and his account is credited with the profit which is transferred from the buyer’s account.

Futures are leveraged products (trade on margin), so a trader needs to only have a fraction of the total worth of a contract to be able to carry it — the broker lends him the rest of the capital. That fraction the trader needs to deposit in his account to be able to carry a contract is known as the initial margin, which the broker can use to offset any losses in the trader’s account. As the account is depleted by losses, the amount in the account should not fall below a certain level, known as the maintenance margin. If the account falls below that level, the trader will get a margin call — the broker requesting him to deposit more money.

The initial margin is usually about 5-20% of the total worth of the contract, while the maintenance margin may be 30-40% of the initial margin. Assuming the initial margin is 10% of the contract’s worth, the traders would need to deposit $10,000 to trade a $100,000 contract, and the rest would be lent by the broker. If the contract makes a 1% up move, the buyer would gain $1,000, which is 10% of his account size, while the seller would lose the same amount. So, in this case, there is a 10x leverage.

Now, coming to the aspect of the final settlement on expiration, different futures products also have a different expiration schedule. Some have a new contract every month, some have a new contract every quarter and some have slightly more unusual schedules. A speculative swing trader who wants to avoid delivery should be aware of the expiration schedule to know when to roll over to the next contract expiry month.

Those who day trade futures never get involved in the actual delivery because their trades are closed on the day they are opened. It is important to know that not all contracts are settled by physical delivery; some like index futures contracts are settled in cash. This can again be done on the expiry of the contract or before the expiry date. 

Understanding swing trading

Swing trading is a speculative trading strategy that tries to benefit from short-term price movements. This style of trading lies in the middle of the spectrum between day trading and position trading. The key difference is the holding period: swing traders hold their positions beyond the trading day but not more than a few weeks. Thus, swing traders are subjected to overnight risks.

Swing traders aim to capitalize on buying and selling the interim lows and highs within a larger overall trend. They use technical indicators to determine if specific stocks possess momentum and the best time to buy or sell. To exploit the opportunities, swing traders act quickly to increase their chances of making a profit in the short-term.

Swing traders can check their positions periodically and take action when critical points are reached. Unlike day trading, swing trading does not require constant monitoring, since the trades last for several days or weeks. 

Why you can use futures contracts in swing trading

So, can you use futures contracts for swing trading? Well, the simple answer is yes. Basically, almost all trades on futures contracts are swing traded. In practice, most speculative traders exit their contracts before their expiry dates as it is not necessary to hold on to a futures contract until it is settled. This implies that traders may hold their position for a few days to weeks. Buyers offset their positions by selling their contracts, while sellers can offset their positions by buying the contract to nullify the agreement.

As in equity trading, a futures swing trader monitors the price of the underlying asset (in this case the stock index such as S&P 500 and Dow Jones). When the price moves in his favor he can relinquish his position. Any gains or losses accrued are settled by adjusting them against the margins deposited to square off your position.

However, swing trading futures contracts is different from swing trading stocks. A trader is only able to close out by entering into a new arrangement with another party. For example, if you purchased futures contracts for Crude Oil from Mr. X, to close out your position you would sell the contracts to party Y.

 For example, a swing trader enters a long position for 30 December S&P 250 contracts, in August. In September, he decides to close his position before the contract expires. To accomplish this, he must short, or sell the 30 December S&P 250 contract to another party. The clearinghouse sees his position as flat because he is now long and short the same amount and type of contract

However, it is important to close out the SAME contract. If a swing trader buys futures contracts for E mini S&P futures for the March quarter, selling futures contracts for the June quarter will not close out the position. This is because the electronic trading platforms allow call up the underlying asset by specifying its base symbol and specific contract.

How to swing trade futures contracts

You can swing trade futures contracts by following these four easy steps:

  • Learn the basics: The first step is to learn how futures work and how to profitably trade the market. You can teach yourself with many of the free online materials on the internet, but you may not learn the necessary things you need to trade successfully. The futures market is very complex, so it is best to enroll in a swing trading course to learn from an experienced trader. If you don’t have time to learn and analyze the market by yourself, you can subscribe to a signal service that will furnish you with the right signals to tell you when to buy and sell.
  • Open a futures trading account: When you have what it takes to trade futures, the next thing to do is to open a futures trading account with a broker of choice. There are many futures brokers that offer online platforms for trading futures contracts. Your job is to find the one that has the features that meet your trading objectives and open an account with them. Factors to consider when opening a futures account include the minimum deposit, trading fees and any hidden charges, payment methods, and ease of withdrawal from your trading account.
  • Choose the contract to trade: After opening an account, you have to choose the contracts to trade. There are contracts for different asset classes, such as equities, commodities, equity indexes, commodity indexes, and many more. There are even futures contracts for non-assets, such as volatility and weather. You choose the contracts you want to trade and study their markets, taking note of the factors that move the markets and how the expiration of the contracts is scheduled.
  • Start trading: When you are ready, you can place your trade orders. The interesting thing about futures trading is that you can easily go long or short as you want. You can use different order types and employ any strategy you like. It is necessary to have a trading plan and stick to it.

Strategies for swing trading futures contracts

The futures market is vast and offers numerous opportunities for swing traders to profit from price movements. However, to achieve great success, you need to use tested trading strategies. Here are some of the strategies you can use to swing trade futures:

The momentum strategy

This futures swing trading strategy is centered on price pullbacks, which occur when the price reaches a resistance or support level and reverses to continue in the trend direction. Pullbacks occur when traders begin to take profits, which pushes the futures price in the opposite direction of its previous trend. The swing trader can wait for the price to get to the resistance or support level to enter at a more favorable price. It is important to wait for the price to signal another impulse wave in the trend direction before entering a trade.

Breakout trading

Breakout trading is a futures swing trading strategy that enables the swing trader to profit from market trends. A breakout occurs when an underlying asset’s price moves past a support or resistance zone. Since breakouts are heralded by an increase in trading volume and open interest, the swing trader can use them as a supporting signal for trading a breakout strategy. The rule of thumb is going short when prices break below support and going long when prices break above the resistance level.

Mean-reversion strategy

This strategy is commonly used in swing trading stocks but can also work very well in the futures market. The mean-reversion strategy is based on the concept that statistical variables have a central tendency — tend to cluster around the mean value. In the case of futures contracts, the price tends to make exaggerated moves to either side of the mean price and then tries to revert to the mean. While trying to go back to the mean, the price overshoots again and tries to revert to the mean again.

The up and down swinging continues on and on, thereby creating tradable opportunities that traders can exploit using some indicators and tools. The key is to identify when the price is in an oversold or overbought situation and is likely to reverse so that you can follow the reversal to the mean. There are many indicators you can use to identify the oversold/overbought conditions, and they include the Bollinger Bands, RSI, moving averages, and price action setups.

How much capital do you need to swing trade futures?

Though there is no legal requirement on the minimum balance a trader must have to swing trade futures, ensure that you have enough in your account to cover trading margins and fluctuations which may arise as a result. Small futures brokers offer accounts with a minimum deposit of $500 or less, while the bigger brands may require minimum deposits as much as $5,000 to $10,000.

 Final words

Swing trading futures contracts are complex and risky but also profitable if you know what you are doing. Whatever strategy you choose to employ when swing trading futures, be sure to understand the market dynamics and your individual trading style. It may be important to learn from experienced traders first through a quality trading course, but if you just want to put in the effort, you can subscribe to a trading signal.

Don't Miss Our

Swing Trading Signals!

$1 for One Month!


Sign up to our newsletter to get the latest news!

Login to Your Account

Signup Here
Lost Password