Some would argue that long-term investment strategies such as those used by Warren Buffett and other value investors can never yield as much profit as a well-executed day trading strategy. It’s not the case. However, although day trading holds massive potential for a quick profit, diligent attention, skill, and experience are required to maintain a high success rate. Even then, amateur traders will often watch their funds shrink alarmingly fast if they do not follow strict rules and risk levels.
Stock index futures
A straightforward technique for beginners to learn is how to trade using stock index futures. The Tokyo Stock Exchange (TSE) offers derivatives contracts on several significant indices, including Nikkei 225 or Topix, which can easily be traded on the spot market.
One of the easiest ways for beginners to get involved is to use a “margin account,” which means you can start with only a fraction of the contract’s total value in your trading account. Still, if your trades are successful, you can increase this day by day or week by week until you have enough capital to trade without this safety net.
It is important to note that it doesn’t matter whether index futures contracts are at a premium or discount compared to their fair value when using index futures contracts for position trading. The power comes from knowing how to take advantage of these short-term moves in either direction.
Once traders gain experience and confidence, a straightforward strategy is called “scalping.” This strategy involves taking quick profits on small price fluctuations in the market, which can last less than a minute. A good time to use this is when an index/financial instrument begins to go up or down within the first 5-10 minutes of trading. If it has not moved by more than 3% after these initial 10 minutes, you will see another bout of consolidation before any further movement.
For example, if an index opens at 10,000 points and during morning trade rises to 10,100 points then drops back to finish at 10,000 points; anyone who bought between these two periods (opened long) could close their position by selling again for a 100 point profit, minus commission and any other charges (see attached chart).
This margin business works the same way in both directions – if during a day or week an index falls 100 points from 10,000 points to 9,900 points, anyone who went short during this time can close by buying back at 9,900 to sell again later when it rises past 10,000.
As most traders know very well, commodity futures are also very popular for position trading purposes. Numerous factors affect the supply and demand of certain goods, which may go up or down in price depending on specific circumstances.
A good example is a crude oil which can be highly volatile due to various domestic and international issues. Traders with knowledge of these events have made huge returns when certain key events occur.
For example, if the Middle East suffers a considerable drop in production, crude oil futures will increase in value due to anticipated future demand. During this period of uncertainty, you can take advantage by going long on WTI (West Texas Intermediate) contracts traded on New York Mercantile Exchange (NYMEX).
If the market rises by 20% during this time, it is a good idea to close your position and lock in some profit. You can do this by selling short again once the price drops back down from its highest point, thus reducing risk should prices continue to fall until the expiration date when they become worthless. Any trader who has been around for a while knows that there is a high chance prices will fall suddenly and unexpectedly days before the contract expires.
By using both index and commodity futures, you can begin to appreciate how powerful position trading strategies can be. Traders who understand these different instruments and use them for varying purposes can make excellent returns on their capital with relatively little risk. It’s not for everyone, but check out Saxo and get involved today if you feel brave enough!