In this article, we are talking to the new futures traders or those that are now banging their heads against a wall trying to figure out how to trade futures or any other financial market.
Step 1 - Get To Know Your Market Type
Many traders dive into trading without realizing the benefits of truly understanding why their chosen market exists. Traders have to pick a market type, but rarely is that done on merit, it’s usually where people “end up”. So, this is our first and most “verbal” Simple Step.
First, let’s consider the major market types:
Forex - 100’s of thousands, possibly millions of exchanges with no centralized or agreed “true price”. Brokers can nudge price around on their back-end platform. Totally unregulated, very cheap to play, and has zero information about volume or order flow. Your broker is typically NOT putting your trades to any real market, most take the other side of your trade and profit when you lose. Forex is also one of the most leveraged markets - which means you can be trading $100 for each dollar in your account. It’s the PT Barnum of trading.
Equities/Stocks - In the US, there are scores of exchanges that are visible as well as dark pools that are less so. It is well regulated and the entry cost for day traders is quite high (needs a $25k account to day-trade). Your broker does not take the other side of your trade, and most allow you to trade for free. So, how do they make money? Well - partly all brokers went to “zero-fee” a while back because a few did it, and they all had to follow. How do they make money? Well - many sell your orders to HFT firms, who are also the reason that dark pools exist - so that large players can hide from them. So, the HFT firm buys orders, gets to see them before anyone else, and executes them for your broker AND pays your broker for it. Not that this is a terrible thing for the retail investor, but with this “hide & seek” game going on where bigger players hide from HFTs- it does make it a slightly disjointed market with activity hidden from HFTs also being hidden from you. Leverage is on the small side, with most retail trades being able to day-trade $4 for every $1 in their account. Equities respond to equity-specific news, analyst upgrades/downgrades - and are open to “insider” trading where someone has news that hasn’t been released yet - like the company negotiating a major deal or takeover. More on payment for order flow in this insightful article: How Payment For Order Flow is impacting markets: The Robinhood and Citadel Case
Futures - A more highly regulated market where each Future relates to a financial instrument or physical commodity like Gold, Silver, Wheat, Pork Bellies, etc. There is mostly a single exchange per futures market. There’s no hiding, nobody sells order flow to HFTs, and the markets are responsive to macroeconomic news (aka “big news”), which by its nature is more open and readily available. Here is a great PDF guide on Futures: A Trader's Guide To Futures. The entry price for futures trading is very low - you can open an account to trade with just $500 at some brokerages. Leverage is much higher than equities, and the amount of leverage varies based on market volatility. So, you get a good “bang for your buck” in terms of leverage like Forex but in a regulated, single exchange market where everyone sees the same information at the same time and where that market is not subject to “insider info” but reacts to world news that is well-publicized.
My take is that most come to Futures after starting on Forex because they don’t have the $25k in an account to day-trade equities. Some try equities, but find it hard to keep up with the work required to find out what’s “in play” on any specific day. It’s worth reading the CME guide, so you understand the reason the Futures markets exist. It’ll help you build your trading edge.
So step 1 - look at the different market types and consider the merits of each. I choose Futures because I like the idea of a single exchange and a more level playing field.
So, let’s presume now that, like me, you choose futures.
Step 2 - Find a Market To Suit You
From my observations, people tend to choose a market and stick to it. Most traders choose the ES or S&P500 Futures, which, right now - is a horrendous market to trade. People gravitate to the ES because “that’s what everyone trades” - and in fact, pre-covid, it was a great market to trade. Decent moves even when the news wasn’t hitting the market - most days you got 4 or 5 really tradeable swings. It did this at a nice pace with ample time to decide. COVID came, the volatility increased, and to this day, it has not returned to normal.
Another way people pick a specific market is by looking at how much it moves each day. They look at “number of ticks/prices moved”, and “amount of money they need to live on” and figure that if it moves more, they can make more money. I’d say that many Crude Oil and Gold traders did the same, but the ES is way more volatile than either of those right now.
Different markets have different levels of volatility - that makes some faster and some slower. Slower markets give you more time to digest the activity that is unfolding before your eyes. Slower markets might bore those with a shorter attentions span. You need to let the market choose you, rather than you choose the market.
Here’s how I’d choose:
- Spend time observing various markets. If one seems too wild and crazy for you - it is. Most fine a level of activity that suits them. Interest rate Futures are generally slower, Crude and Gold currently in the middle (where ES used to be) and Dax, Nasdaq are among the fastest and most volatile.
- Sectors you have knowledge in. So if you are a pig farmer - then meats would fit. If you work for Aramco, then maybe oil. But if you know a market because you work alongside it - you’ll likely be aware of the seasonal impact, and drivers of price change. It’s not essential, but it’s definitely going to shorten the learning curve.
- Markets that are active when you have time to trade. If you are working and only have US evenings to trade, then US index futures might not be the best as the underlying stock market is closed when you are available. On the other hand, the Asian markets are opening and every country in the world uses oil. You can also look at currency futures - like the Japanese Yen which is obviously getting active as the Japanese markets open. The last thing you want to be doing is sitting watching the S&P 500 doing nothing after a day where it moved 100 points. It’s like missing the party, every day.
You can just trade the S&P500 because “that’s what everyone else does”, or you can find a market that is suited for you. Later on, you’ll be trading multiple markets - but pick the most suitable one for you.
Step 3 - Find What Moves The Market
There are a few things that will move a market:
Previous Market Activity - This could be long-term or short-term. At Jigsaw, we focus on the shorter term - things that occur within one day. So, we are looking at places other traders might be in a bad position or a place that seemed to be a decision point previously. This is the “technical” aspect of the trading game. Looking for an activity that might give you a “skew” in expectations.
The skew isn’t in win-rate necessarily. Let’s consider a place where you think the market might break from a range and run stops (people in a bad position all getting out at the same time and moving the market to your advantage). If we hit those stops - the market will run quickly, if we don’t - the market will carry on in its slow, small range.
So, these plays, continuation plays - they are what I’d call “bread & butter” trades. They are playing the ebb and flow of speculator activity each day, which occurs in the absence of news.
Economic Releases - Economic releases are scheduled events that occur regularly. Employment numbers, interest rates, manufacturing data. Some are market-specific, like the Oil Inventories numbers that come out each Wednesday (or Thursday if Monday is a holiday). Most releases have an estimated number that is known well before the release, and then we get the actual number, which can be better or worse. Typically, 10-15 minutes before the announcement, the markets impacted will become erratic as people don’t want to engage and the liquidity drops. Then the announcement comes out and based on whether it’s a hit or miss - people will trade. Sometimes nothing happens, and sometimes the market goes on a tear.
The key here - even if you are not trading the announcements or their reaction to them - they will impact your trading. If you have a position on when we go into an impactful announcement for that market - you need some breathing room in the trade because the market could get hit by a wave of buying or selling.
Unscheduled News - Unscheduled news can hit markets hard. Futures are “Macro” markets - so are generally hit by larger news. Last year, Crude got impacted when a missile hit a Saudi oil refinery. This immediately changed the Crude Futures markets. Less oil = higher prices. In fact, this story impacted the markets a few times - when the missile hit, the ongoing speculation about who lobbed it over there, and then when a Saudi price came on and told us all the refinery would be back online in weeks.
Semi-Scheduled News - These are press conferences where something is being announced. Like trade agreements, tariff changes. They are at a specific time, but we don’t get to know what it’s all about till the press conference itself.
To many - this all seems a bit scary. I mean, “I’m just a computer programmer, I don’t know what impacts the markets”. The mistake many makes is in feeling they have to pre-empt, predict, or somehow understand how a market will react to positive or negative news. The news is important for a few reasons:
- It creates immediate, unexpected (well, unexpected to anyone who didn’t know about the news) volatility. If you are in a new trade without much breathing room, the volatility is likely to cause a loss. Even if you are right about the trade, the volatility can still cause your trade to be stopped out. A major miss could cause a huge rush that not only sees your trade loss, but sees you get a terrible price on getting out of the trade.
- Any move that starts with a news event can be considered “premium”. So if markets initiate a new move on strong news, it’s not the same as speculators getting stopped out because a range broke. The resulting move is different and the duration of the move is different. What you needed to know is that the news hit, people came in, and that is what is behind the new move. Of course later, your “news game” will grow but initially - know it is there and tread lightly around it.
Many traders try to narrow down trading to “it’s all in the chart” to which I politely respond “Donald Trump's 3 am tweets weren’t in your charts, were they?”. It’s simply a matter of fact that the markets are influenced by many things and some of that is other traders' activity, but some are “the real world” and you need to focus on both. The trouble is - people think you need a degree in economics to use the news. You don’t.
Step 4 - Stop Throwing Techniques Away
The single largest factor in trader failure that I see is people throwing away perfectly good techniques because they “stopped working”. They find a technique, apply it, get good results - then disaster strikes, and they stopped working.
Sometimes this is because of news. The day that missile hit the Saudi refinery, oil went crazy. If you tried to use techniques from the day before on that market - it would not have been pretty. Just from a pure volatility perspective - you’d have needed wider stop losses.
Look - these markets are traded by people - with all their quirks and biases. You can’t trade the markets like they are driven by a machine.
So, what happens, they have a perfectly good technique for a more moderately paced market and then the market changes pace, it stops working, and it gets forgotten forever. So, the professional trader, with his basket of trades - sees a change and changes his approach slightly. What the home trader does is throw away their current approach entirely.
I advocate setting your own list of market states. If you use somebody else’s, then you’ll always be wondering - would they call this type a or type b. Instead, simply write down a list of market states as you see them. For most, they’ll probably start with
- This is so slow, it’s boring me to tears.
- I like this, just nice, steady action with decent resulting moves.
- This just switched gears and all the bids/offers have gone. What did I miss (hint: check the news).
- This thing is crazy today.
- Don’t know.
Just define then how you see them. Expect to add more nuances later. When something works and then stops - don’t just throw it away. Look to see if the market was acting differently, and you didn’t notice it. Bring the technique back when the conditions are ripe for exploiting it.
Step 5 - Go With The Flow
Retail/Home Trading in some ways could be described as a “cult of high/low fortune-tellers”. People come into this game and tend to gravitate around ways to calculate where the high or low of the day will be. Here’s a hint - nobody knows in advance. Nobody. Not even “they” - who is a fictional trading entity used in sentences like “they are taking the S&P500 to 4600” and “I would have made $10,000 if they hadn’t moved the market against me” and “they are my lunch and stole my homework”. There is no “they” - but that discussion is for another day.
The downside of this “search for the best way to find the future low” are as follows:
- Traders end up buying a falling market and selling a rising one. After all - it has to be dropping to get to your predicted low. So, you always trade against the market.
- You have 1 shot. One entry point. What do you do when it fails? You are now down for the day - do you have another prediction lower down? Or do you now have to wait for the market to reverse and play your “predicted the high” trade? What if that fails? 2 losses for 2 on the day? Those playing WITH the market can trade with the market all day. They can keep taking pullbacks in an established trend, they can play ranges within the trend. Boxing yourself into 1 or 2 “Big Winners” a day is going to have you NEEDING your trades to win. Taking bites all day - no big deal if you miss one or if you finger fumble one.
So going with the flow is partly letting the market show its hand in terms of range or trend - and then taking advantage of that momentum.
Another part is observing the flow directly. Charts are great - they tell you the result of trading activity, they can show you prior ranges, and they can show you the trend. All good stuff - but they don’t show you the current activity of buyers and sellers - which is very useful. This is why professional traders use the Price Ladder/DOM (although a better version than those in a mass-marketed platform whose customers haven’t discovered its power). It’s the icing on their cake. If you trade into stops - you will see those stops fire. If you want to go long but all the activity is selling, you hold off. If you are in a position and all the activity is clearly on your side, you stick with it.
It’s the icing on your cake, but also - consider big oil news that looks to reduce inventories, hedgers will be clamoring to buy contracts fearing price rises - but even if they needed to buy ten’s of thousands of contracts - they will not do so in one go. They want good prices, so they weave in and out all day trying to buy without moving the market too much.
So, we have our entry points that “go with” the markets, and we use order flow to ensure we aren’t going against a bunch of people trading in the opposite direction.
A good example of trades you can take to go with the flow is in this video here: Most Effective Day Trading Strategies and Order Flow Setups, and we also discuss the supporting order flow you should see at each point.
In trading - “the easy way is the hard way” - the aversion to using news in trading exists mostly because players in unregulated markets can promise anything and that eventually boiled down to “buy our product today, be profitable tomorrow.” - yet we do not see people online that have done this. But the promise itself seems to have programmed people to avoid doing any actual work or treating it like the profession/business it is.
Each week I meet people with years of “I will look at a chart and nothing else”. When asked what they tried they say “everything” when asked what worked, they say “nothing”.
And this article is for them because some of their “nothings” are likely things they’d be profiting from today if only they’d followed the 5 steps.