Learning Futures with Low Risk and Sound Strategy

Learning Futures with Low Risk and Sound Strategy

Jan 3, 2022

By Frank Kaberna

Most New Year’s resolutions are doomed from the start. You create too lofty a goal that must be accomplished in 365 days and usually commit too intensely in the first 30 and fall too easily back into bad habits by day 100.

A similar practice often thwarts people’s plans for further financial literacy. “This year, I’m gonna take on futures,” can start with a manageable target of one trade per week or even month and build with your confidence. But what’s a manageable target in futures?

A Data Driven Approach to Broaching Futures

Two things make resolving to start trading futures in 2022 easier than in years past:

  1. The size of futures, and thus their potential risk, is much smaller than traditional products thanks to Small and Micro futures.
  2. Historical data on most futures markets is available through your platform and online services like this one.
S2Y \ Small 2YR Yield Futures Daily Standard Deviations

Source: dxFeed Index Services

Starting with one of the smallest futures and simplest strategies out there, you have the Small 2YR Yield futures (size: $750) and daily standard deviations (range: +/-$33).* Daily standard deviations lend to day trading - a strategy that can make getting started relatively low stakes considering the position won’t survive the close.

Examples of Day Trades

Though there are two fundamental ways of interpreting opportunity relative to standard deviations - contrarian and trending - these examples will focus on the former.

S2Y \ Long Day Trade Example

Source: dxFeed Index Services

On Friday, December 10, 2021, S2Y fell outside of its 1 standard deviation range to the downside, which could have posed a buying opportunity in the futures.

S2Y \ Short Day Trade Example

Source: dxFeed Index Services

On Wednesday, December 15, 2021, S2Y rallied outside of its 1 standard deviation range to the upside, which could have posed a selling opportunity in the futures.

S2Y \ No Day Trade Example

Source: dxFeed Index Services

On Thursday, December 30, 2021, S2Y stayed inside its 1 standard deviation range, which could have posed no opportunity in the futures.

A Data Driven Approach to Closing Futures

It hopefully comes as no surprise that the same data that gave you a reason to open futures can help you decide where to close the position. Here are the two routes to exiting your trade:

  1. Taking a fraction of the standard deviation in profit or loss like ½, for example, would cause you to close the position when your daily P/L shows +$16 or -$16.
  2. If neither target is hit by the end of day- 4pm Central for Small futures - then you can simply close as that time approaches.

Resolutions can seem insurmountable when built up to unscalable heights in the mind, but almost any goal is achieved with small, short-term accomplishments. Let the day trade in Small futures be your vehicle to finally getting into futures this year.

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*Values taken on 12/30/21

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