How Day Trading With Common And Popular Market Derivatives Work?

Financial derivatives vary and calling them a solitary market is a little deceptive. Financial markets include currencies, shares, indices, commodities, etc. There is a financial derivative associated to each one of them.

Derivatives are tradable products of underlying markets like share markets, stock markets, currency markets, etc.

Derivative market kinds

Generally, you will find several derivative markets. Each one includes thousands of individual and tradable derivatives. One day trader makes use of

• Options market

• Futures market

• CFD [Contract for Difference] markets

Day trading with Futures

Day trader buys and sells future contracts on the same day with holding overnight short or long positions. Trader needs to be disciplined and experienced for successful day trading futures.

Pros

• Future day trader sleeps well because no risk exists as position gets closed on the same day.

• Generally, futures open at varied prices than at what they were closed the day before.

• Price volatility indicates the escalation of risk or benefit from unexpected profits or losses, when positions remain open overnight.

• Day traders earn more in comparison to weekly investors.

Temptation of making more marginal trades increases in futures market, which can lead to over trading. Commissions add quickly in day trading. Traders willing to perform their research, develop robust plan, and follow it strictly can find futures day trading a profitable venture.

Day trading with options

Options offer leverage and limiting loss capabilities, but day trading strategy in option markets can be complex.

For trading purpose the bid and ask spreads are wide, so to capture market price movements of a day needs precision timing. It is lucrative, but needs quick trade entry and exit.

When an option is purchased, you will need to pay asking price for conducting a transaction quickly. Later, when you sell it, the bid price needs to be accepted. Bid and ask price difference for most of the liquid options are 2% to 10% of option’s total value.

If there is time to wait then limit orders can be used to avoid full spread payment. However, there is no time available in day trading, so use options with little time value. Options are best for hedging an existing position. Properly executing day trading options enable investors to invest small amount than the actual stock price. In catastrophic collapse of underlying asset, loss experienced is limited to the premium paid.

Day trading with CFD

Day traders open CFD position on more liquid volatile assets. Contract for difference allows trader to make profits from small price moves. For example, you are actually betting on the TWTR share price with margin of 50% of total share value. It is much less in comparison to what needs to be paid for futures contract.

CFD is well suited for day trading time scale. You don’t require tying your capital as the position is held till the end of trading session. It even allows grabbing trading opportunities as quickly as you identify them.

In day trading, timing is very important and you will need to possess the capability of making instant decisions. What actually matters in short frame trades is the capacity to spot price movement prevailing trend.

Important tip

• Day trading shares, CFDs, or options has increased because it is lucrative. There is less capital needed to be invested in any kind of derivative markets.

• Day trading needs effort and commitment to enhance the chances to succeed. It is not a concept of getting rich overnight. Errors are inevitable but it is necessary to learn from mistakes and correct them.

• Day trading means trader can work from the convenience of their home, be your own boss, select appropriate working hours and be committed. Eventually, you will be rewarded amply of being a derivative market day trader.