Chapter 12: Tools for Futures Trading
We have discussed concepts that will help you to plan and provide an overall map for navigation in building a flow for futures trading. And now, let’s fasten your seatbelt as from this chapter onwards, we shall be focussing on the process of executing the trades.
Step 4: Tools for the Execution of Futures Trades
Traders deploy their strategies based the research that goes into their planning and with the help of future trading tools, traders can quickly refer to their findings, especially during live market hours.
Some of the best future trading platforms may have sophisticated technical analysis software or charting tools for traders. With just a click of a button, these tools help identify trading opportunities under their desired trading setup. Amazing, isn’t it?
With the advent of technology, nothing seems impossible and for traders, these tools have become an integral part of their trading system.Before discussing these various hybrid tools, a quick look at the modern tools made available to traders by brokers these days which enable traders to directly trade online on applications.
Earlier, futures trading took place at brokers’ premises, where these brokers had trading terminals on which trades were executed. A trader either used to go to a broker’s office or place the trade over a phone call.
The broker then punched the trades on the terminals which were connected to exchanges and bids were matched on these terminals. Things have changed now.
Brokers now develop trading apps that enable traders to place orders directly on the application and bids are matched online. In fact, a trader can use the app or platform from the comfort of their home.
These apps also allow traders to track the positions on a real-time basis and provide various statistical data points like open high low closing prices, technical analysis indicators many other analytical tools which a trader can use to track market movements.
All this with just a click of a button on a computer or laptop or even on a smartphone. This gives traders the freedom to operate from any location desired and allows a trade to never miss a trading opportunity on a real time basis.
Let’s get back to step 4 – Execution of trades using futures trading tools.
As we learnt that traders these days have all the latest future trading tools on smart applications and some brokers offer these at a upfront cost or subscription based model, besides the regular brokerage charged on trades.
Lets look at some of the tools which help can help traders in futures trading.
Live and Historical Charts for Technical Analysis Study
Trading apps are equipped with price charts which are a graphical representation of data showing the price movements of futures.
Typically, charts depict the price history in the form of a graph, showcased in different types of styles like bar charts, line charts, Japanese candlesticks, etc.
Professional future contract traders like to study and keep track of the price movements of the underlying asset or futures contracts (or both) to spot trading opportunities due to changes in price.
Charts make it easier to analyze price movements in multiple time frames which allows traders to understand and anticipate noticeable patterns in price movements. When it comes to technical analysis, it is believed that “history repeats itself”.
If any pattern is identified with the help of previous data on charts, traders can backtest their trading strategy to decide their risk to reward ratio before taking a trade.
Since these charts are being prepared tick by tick these days, it’s a bonus for every trader who trades in any segment of the market..
Technical Analysis Tools & Indicators
As mentioned earlier , professional traders use charts to monitor price movements. This study and monitoring of price movements on charts is known as technical analysis.
Traders analyze price movements with the use of data on charts and predict probable outcomes based on patterns discovered in the past, by studying price movements in the underlying assets.
On the flipside, charts that display only historical prices and limit traders with just the analysis of price movements, isnt it ? But what if we told you charts have much more to offer.
A genre of traders use charts along with technical analysis indicators have emerged, referring them as technical analysts. They can use these indicators to forecast future price movements.
Some of the examples of widely used technical indicators are Relative Strength Index (RSI), Bollinger Bands , moving average convergence divergence (MACD) and many more that help active traders to identify entry and exit points in the shorter term.
Traders inherently have the attribute of speculating and tools like technical indicators help them to identify trends in the markets and also time their entry and exit points on the charts.
Like other analytical tools, technical analysis requires a disciplined and a systematic approach minimising the impact of human emotions and any biases.
Many futures traders use technical research along with other analytical approaches, such as quantitative, fundamental, and macroeconomic methods to develop their trading plan and add depth to their trading career.
Popular technical indicators used by traders which can be directly applied live charts of future contracts that can indicate BUY OR SELL signals based on a defined logic that these indicators imply.
Many apps enable traders to use technical indicators on real-time charts and based on these indicators, traders decide when to trade and also define their risk and reward ratios. Dhan, for example, helps you access 100+ technical indicators on charts for free!
Besides technical indicators, features like multiple time frame analysis, open interest data (how many contracts are added in a particular futures contract), can be used by traders who are looking to make sustainable profits in the futures market.
This brings us to the end of this chapter. In the next chapter we shall discuss some widely used futures trading strategies featuring all the steps we have discussed until here.