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Can You Use Futures Efficiently In Swing Trading? (Strategies and Indicators)

Last Updated on 17 February, 2024 by Trading System

Futures allow traders to speculate and gain profits from price movements of an underlying asset in various markets. One recurrent question among swing trades is whether they can use futures contracts for their trades, given that futures contracts seem to be more suitable for day trading and scalping. However, swing traders can also use futures contracts by applying technical analysis to identify potential trades and gain profits from price movements. So, it makes sense to want to know 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.

 

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 futures markets during a trading session. 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. Trading decisions are made based on market trends and analysis of previous trades.

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 trading session — to trade execution 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 trading session 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. Both parties aim to make profitable trades by predicting market trends.

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

The price of futures contracts in the markets 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 in USD. The size of the tick varies by the futures contract being traded in stocks. For example, while the E-mini S&P 500 (ES) moves in $0.25 increments, crude oil (CL) moves in $0.01 increments with fees applied accordingly.

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 in the markets, it has an obligation to purchase the underlying asset, such as stocks, 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. This can be useful for day trading and is often facilitated by brokers.

Thus, as the stock futures market price changes, the parties gain or lose USD 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, with fees applied accordingly.

For example, if the buyer purchases a futures contract at a futures price of $100,000 in the markets and opens an account with a broker, and by the end of the day, the price makes a 1% gain ($1,000) in USD, 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 required for futures trading is usually about 5-20% of the total worth of the contract, and traders can rely on brokers to lend them the rest. In the futures markets, day trading is a popular strategy that requires traders to maintain a maintenance margin of 30-40% of the initial margin. Assuming an initial margin of 10% of the contract’s worth, a trader would need to deposit $10,000 to trade a $100,000 contract with a 10x leverage. If the contract makes a 1% up move, the buyer would gain $1,000 while the seller would lose the same amount.

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. Day trading in these markets requires careful attention to time and being mindful of the expiration schedule is crucial to avoid any unexpected delivery that could negatively impact your trading account.

Those who day trade futures in the stock markets 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. For those who prefer swing trading account, it is essential to understand the term of their contracts.

Understanding swing trading

Swing trading is a speculative trading strategy that tries to benefit from short-term price movements in the stock market, index futures, and futures markets. 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, using margin to maximize their profits. Thus, swing traders are subjected to overnight risks in these volatile markets.

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. Day trading and futures trading are also popular among traders looking for short-term gains in the futures markets. To participate in these markets, traders need a trading account.

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 in the markets? 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 short position for a few days to weeks on margin. Buyers offset their positions by selling their contracts, while sellers can offset their positions by buying the contract to nullify the agreement. Some traders also opt for services such as trading signals and market analysis to aid their decision-making process.

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

However, swing trading futures contracts in the market is different from swing trading stocks. A trader needs to have enough margin to enter into new arrangements with another party. For example, if you purchased futures contracts for Crude Oil from Mr. X, to close out your position you would need the services of one party Y to sell the contracts.

For example, a futures trader who engages in day trading enters a long position for 30 December S&P 250 contracts, using margin, in the futures markets during August. In September, he decides to close his position before the contract expires by shorting, or selling the same 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, which is a common strategy used by day traders in the futures markets.

However, it is important to close out the SAME contract in the market. If a swing trader buys futures contracts for E mini S&P futures for the March quarter with a margin, selling futures contracts for the June quarter will not close out the position. This is because the electronic trading platforms allow calling up the underlying asset by specifying its base symbol and specific contract. It is essential to have accurate information and services to ensure successful trading.

How to swing trade futures contracts

You can day trade futures contracts with margin by following these four easy steps, using services of one broker.

  • 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. Here is a good article we wrote about swing trading strategies. They work on both futures and equities. Here is another one about swing trading indicators that work well on futures also. 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 with margin. It is important to wait for the price to signal another impulse wave in the trend direction before entering a trade. This strategy can be executed within one day, providing quick profits. For more information, it is recommended to research and analyze market trends.

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. If you need information on how to open an account, check out our site. It’s important to note that traders should monitor their accounts closely throughout the day to ensure they have enough funds to cover any potential losses.

 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 or site, but if you just want to put in the effort, you can subscribe to a trading signal for day-to-day information. One thing is for sure, it’s important to stay informed in order to make the most of your trades.

FAQ

How do futures contracts work?

When a party buys a futures contract, they commit to buying the underlying asset at a later date, while the seller commits to selling. The value of the contract fluctuates daily, and settlements can be done through Mark-to-Market or on the last trading day.

What is leverage in futures trading?

Futures contracts are leveraged products, allowing traders to control a contract with only a fraction of its total worth. The initial margin is the amount a trader needs to deposit, and brokers may lend the rest.

How do you swing trade futures contracts?

To swing trade futures contracts, one should learn the basics, open a futures trading account, choose the contract to trade, and follow a trading plan. It’s essential to have a good understanding of the market.

What factors should be considered when opening a futures trading account?

Factors include minimum deposit, trading fees, payment methods, and ease of withdrawal. Traders should choose a broker that aligns with their trading objectives.

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