Active futures traders use a variety of strategies and methods to earn returns from the markets. From technical approaches to fundamental strategies and ultra-short-term to long-term holding periods, there are strategies and styles to suit everyone’s taste.
For a new trader entering the futures market, developing a comprehensive strategy can be a daunting task. A good starting place for beginners is to study the three types of active trading: intraday trading, day trading, and swing trading.
An important difference between these three styles is the length of time a trader holds an open position in the market, also known as duration. As a trade’s duration increases, so does the trader’s exposure to market risk.
Holding periods are important elements of your trading style because they directly relate to the technical system you use and the return drivers you are trying to exploit. Your trade duration must match your technical (or fundamental) approach because some trade setups take longer to materialize.
As the name implies, intraday trading involves trading—often multiple round turns—within a single session. Traders manage open positions in terms of seconds, minutes, and hours, with the objective of capitalizing on intraday fluctuations in price.
Most intraday trading systems are rooted in technical analysis. Technical analysis is the study of price action and holds that a study of price can determine future moves in a market. Contrary to popular opinion, technical traders do not dismiss fundamental analysis but hold that fundamentals are usually embedded in price. Scalping, high-frequency trading, and order-flow analysis are a few types of trading strategies exclusive to the intraday approach.
Each of these strategies relies on a deep, liquid market. Scalpers are generally attempting to continuously buy the bid and sell the ask. Similarly, high-frequency trading and order flow analysis rely on the ability to quickly exit a trade that turns negative.
Markets that offer substantial depth and liquidity are optimal for intraday trading. Entering and exiting the market efficiently is the key, and insufficient liquidity increases trade-related costs associated with spreads and slippage. Intraday strategies depend on making small profits while assuming limited risk repeatedly to create profitability. Futures products, such as WTI crude oil and the E-mini S&P 500, are ideal targets for intraday traders.
Less liquid markets trading lower volumes are not ideal for this approach because they do not have the depth of order book to sustain it. Traders looking to take quick bites of the apple don’t get stuck in an illiquid market that can be hard to exit.
Day trading is often confused with intraday trading because many market participants use these terms interchangeably. To be fair, both strategies trade intraday, but whereas intraday traders tend to trade multiple round turns in a day, day traders focus on one or a few setups they know that they will exit on the close. In contrast to the intraday approach, day trading is the discipline of opening a position in a given market only to make an exit at the closing bell.
Momentum, range, and trend-following are three popular types of trading ideal for the daily time frame.
Momentum trading uses technical tools to identify overbought and oversold conditions and the strength of trends to determine market direction. Range traders attempt to identify a market’s likely parameters, and they sell when a market reaches the top of the range and buy near the bottom.
Trend-following, more typically related to medium- to long-term strategies, is often used in a shorter-term approach by simply using shorter-duration analysis. Instead of looking at hourly or daily price bars to identify trends, a technical trader will look at one-minute or five-minute bars. Typically, they will want to align the short-term trend with the longer-term trend to confirm a trade signal.
Day traders don’t typically deal in a high number of trades. Instead, a day trader identifies a premium opportunity early in the trading day and then executes it on a session-by-session basis.
Characteristics of a target-rich day trading market include a large range and inherent volatility. Although most intraday strategies rely heavily on technical analysis, liquidity, and price action to prove valid, day trading strategies also frequently incorporate various aspects of fundamental analysis.
Swing trading is the buying and selling of futures on a multisession basis. Typically, swing trading strategies hold positions through at least one session or close. Swing trades commonly last anywhere from 2-6 days but may extend several weeks.
Swing traders are often more reliant on fundamental analysis than intraday or day traders, although swing traders use technical tools and indicators to identify a trade’s entry point (i.e., the swing). Traditional fundamentals, including macro-trends and geopolitics, can play key roles in their trade selection and management.
Technical-based swing strategies are similar to the short-term-trend-following approach discussed above. The main difference is they often try to identify retracements in larger trends (countertrend trading) rather than confirming a move aligns with established trends.
Holding an open position through a market’s close requires a swing trader to contemplate margin requirements, carry and finance costs, and overnight risk exposure. Because of the added margin requirements and risk, a swing trader needs to identify more profitable trade setups than intraday and day traders. Swing traders can’t be satisfied taking a few ticks out of the market on a successful trade because their costs are higher. Swing trading is a popular approach for all futures market sectors.
Achieving longevity in trading relies on choosing the style best suited to your resources, capabilities, and risk tolerance. No matter which type of trading you prefer, successful implementation requires discipline, dedication, and tenacity.
Properly aligning your available resources and trade-related goals is a big part of succeeding in futures trading. That’s where advice from seasoned futures trading experts can help. Download our Comprehensive Training for Futures Traders e-book today for insights into becoming a more effective trader.