November 08,2024 @08:00 AM
There are many myths that can shape the way that traders approach the futures markets. Watching these myths, they are oftentimes built around assumptions that contribute to unrealistic expectations and unnecessary barriers for traders.
Today’s myth is one that we hear frequently from traders: “You need to be glued to your screen all day to trade futures”.
It is easy to see where this misunderstanding comes from. Futures markets are leveraged products, leaving many traders to believe that the only way to succeed is by remaining vigilant of market movements at all times. However, this is not the case for many successful long-term traders.
Understanding the Myth
Futures products can be traded with small margin often equating to 3% to 4% of notional value of the product, especially when using day margins. This amplifies the risk of profits and losses. With relatively small capital, the resulting P&L fluctuations can be significant. Leverage in futures is a double edged sword that can work in your favor as well as against you. When trading futures, it is essential to assess your financial circumstances before stepping in to beat the market. As the saying goes, “Markets can remain irrational longer than you can remain solvent“. Many new traders mistakenly believe that to succeed in futures trading, they need to be constantly active and monitoring the market.
Popular media also plays a role in feeding this myth by portraying traders locked in on their screens, constantly monitoring market movements. These traders are depicted as living off of high adrenaline and making split-second decisions while watching the markets all day. While there may be traders that follow this exaggerated approach, it certainly is not the only way to approach the markets.
There are many approaches and styles that you can execute within futures markets. Whether you are a day trader, swing trader, or a long-term hedger, there are trading styles that don’t require you to be watching a screen all day.
For many successful long-term traders, their success stems from the strategies they use, risk management practices, and discipline—not simply the amount of time spent watching the market.
Different Approaches to Trading
Algorithmic Trading
This trading approach relies on advanced algorithms paired with human oversight, making it relatively hands-off. Algorithmic trading automates the process of executing trades based on a trader’s defined criteria.
Before equipping an algorithmic trading approach, a trader programs specific rules for when the program should buy or sell based on technical indicators or other market conditions.
EdgeClear offers EdgeQX, a robust automated LOD program that has been trading live since September 2022. It provides traders with an opportunity to diversify their risk by complementing their own portfolio with this hands-off automated system.
Trend Following
Trend following is a straightforward approach to trading in which traders capitalize on market trends, rather than trying to predict reversals or countertrends. This approach is especially useful in markets that produce strong directional movements, like futures, as trends can exist for longer periods of time.
To begin this approach, traders identify a trend—either upward or downward—and align their trading strategies with that direction. The key to this is not in predicting when a trend will start, but rather recognizing when it’s already in motion and riding that wave until signs of reversal appear.
Many traders use technical indicators to identify market movements and potential trends. At EdgeClear, traders gain access to sophisticated resources like EdgeProX, which is designed to help analyze markets, identify trends, and make well-informed trading decisions.
EdgeWatch also provides an equity curve that charts running P&L, allowing traders to compare their overall profitability with their performance on a per contract basis. Having a strong visual representation of strategies allows for traders to gain a deeper understanding of how each individual trade contributes towards long-term success. Some key features include win/loss graphing for any time period, showing traders how their strategies are performing.
Risk-Based Trading
Trading with this approach relies on risk management above all else. In risk-based trading, traders define clear risk parameters for every trade they take, focusing on the amount they are willing to lose over solely aiming for large gains. By implementing the risk-based trading approach, a trader is preserving their capital and minimizing their exposure to major losses, increasing the likelihood for long-term success.
A cornerstone of this approach is position sizing. Traders calculate how much capital they should allocate to a trade based on their risk tolerance, which is often a percentage of their overall account. Doing this ensures that if a trade were to go against them, that it won’t have a significant impact on their portfolio. Traders can couple this with stop-loss orders, enabling them to define an exit point on their positions to limit losses. It is important to note that during some market conditions, larger losses are still possible than that defined by a stop loss order. We recommend using market data and platforms that support server side managed OCO orders.
At the end of the day, the most vital part of taking a risk-based trading approach is maintaining strong discipline. A trader should stick to predefined risk rules so that they do not fall victim to emotional trading decisions, like doubling down on a losing position.
Spread Trading
Spread trading involves simultaneously buying one asset and selling another related asset, typically within the same market. By doing so, traders aim to profit from the price difference between the two positions. Within futures several types of spreads are commonly used, including calendar spreads, inter-commodity spreads, and intra-market spreads.
What makes spread trading widely used within the industry is its ability to reduce risk. Traders minimize their exposure to outright market movements by holding two offsetting positions—focusing on the relative performance between the two assets. This reduces the risks associated with market volatility, creating a more controlled trading environment. However, since spread trading involves going long and short, overall costs of trading are higher too.
For example, in a calendar spread, a trader might buy a June crude oil contract and sell a December contract. They would likely be aiming to profit from the difference between the two months. This approach offers lowered risk because the positions will partially offset each other, along with typically having lower margin requirements. There will still be markets where trading spreads may reduce some risk but due to liquidity in forward months, this risk may increase during certain market events.
When using the proper tools and strategies, spread trading can be a flexible and risk-managed approach. Whether traders use it in tandem with other methods or as a standalone approach, it is favored by many futures traders to balance their market exposure.
Tips for Managing Screen Time Efficiently
Traders can easily fall into the habit of constantly watching the markets. Futures markets leave many traders to believe that they need to track every price movement to be successful. However, this habit can actually lead to burnout, poor mental health, and emotional trading decisions, which can have a negative impact on their long-term performance. It’s important to have a solid understanding of market conditions, but overconsumption of market data can negatively impact your trades. Here are some tips to help reduce your screen time without sacrificing your performance.
Define Your Trading Plan
It is essential to have a detailed and fine-tuned trading plan. By setting clear guidelines for your entry and exit criteria along with establishing risk management rules, you can execute trades with greater discipline. Sticking to a defined trading plan consistently ensures that your actions are led by strategy over emotions, which can lead to more consistent and calculated results.
For a deeper dive into creating an effective trading plan, check out Ian Blanke’s article on the subject here.
Set Alerts for Key Market Events
Having customizable alerts can be an effective way to manage time more efficiently. Platforms like EdgeProX allow for traders to configure alerts that notify them before or during important scheduled economic releases and indicator alerts can be set for volume spikes or trend reversals.
Setting these notifications keeps you informed of important market shifts without the need to constantly watch the charts.
Review and Adjust Your Strategies Regularly
It is extremely important to review your trading strategies and performance periodically. In order to do this on a regular basis, you should schedule times to analyze your win to loss ratio and performance metrics, adjust your risk management settings to align with market conditions, and refine strategies and backtest new ones to implement.
Doing this consistently will help you to avoid turning towards reactive trading and instead focus on continuous improvement. Read Niko Pozzi’s piece about trade discipline to gain a stronger understanding of how to remain strategic and composed when evaluating your trading plan here.
Adopt a Long-Term Mindset
Becoming invested in only short-term market movement is a common detriment for traders. Adopting a long-term mindset can help to reduce the pressure to monitor every single tick. By utilizing an approach like trend following or spread trading, traders can let positions run for longer periods of time. This can reduce the need to consistently monitor the markets.
Myth Answered!
The idea that traders need to be watching their screen all day is a harmful myth within futures trading. The truth is that many successful long-term traders operate without constant screen monitoring.
With the right tools, approach, and strategies, traders can execute trades and become profitable long-term—all without continually watching markets. At the end of the day, having a disciplined and strategic trading approach is the key towards meeting your trading goals. The myth that constant monitoring equates to success is not true for many traders that achieve their trading goals consistently.
Disclaimer: Derivatives trading involves substantial risk of loss and is not suitable for all investors. The views expressed are personal opinions and should not be interpreted as financial advice.
