Trading futures is something most investors are probably at least familiar with, but have you ever considered doing it yourself? While it is not for everyone, it can be particularly profitable under the right circumstances.
Five things investors should know
Before even thinking about getting involved in trading futures, it is imperative that investors do their research and know what they are getting into. Specifically, they need to know the following:
It’s not really investing
Despite having the word “future” in it, futures trading is not a long-term investment strategy. Unlike stocks and mutual funds that can be held for years and gradually accumulate earnings, futures trading is about short-term speculation. When buying a futures contract, you are generally waiting for an impending expiration date. It is possible to trade for the long term, but this is not the norm.
With that being said, futures trading can serve as an excellent form of diversification if investors have all of their funds tied up in long-term investment vehicles. They just know what they are getting themselves into.
Know which markets to trade
“You should trade what you know,” senior market strategist Jeff Ratajczac advises. “That sounds easier than it is. Stock traders may have an easier time transitioning to futures index trading because many of the fundamentals that move the market are the same. If you want to trade other markets, be sure to do your homework. Learn what moves that particular market or make sure your broker has good understanding.”
Futures traders generally pick a specialty or two and stick to those markets. This reduces the learning curve and allows traders to really get a grasp on how specific markets react. Dipping your toes in too many markets generally makes you an expert in none.
Understand the concept of leverage
Investors must understand the concept of leverage if they plan on being successful in the futures market. Trading futures comes with massive amounts of leverage, which can allow investors to turn $10,000 into $100,000 in no time. But, by the same token, it can also turn $10,000 into a $100,000 loss if they do not know what they are doing. Unlike other forms of investing, you can actually lose more than you put in.
Because losses are a very real possibility, investors have to be patient and calculated. It is easy to get caught trying to chase losses, which rarely works and tends to dig deeper holes.
Invest in education
The more a trader knows, the better off they will be in trading futures. The issue many traders have is that they experience a big gain in the early stages of their time trading and then assume that they have it all figured out. The truth is that trading strategies and markets are constantly fluctuating and the only way to enjoy sustained success is by keeping up with new trends and concepts.
Develop and follow a strategy
“Traders generally fall into one of two broad categories: Discretionary and systematic,” says expert Jean Folger. “While both groups develop and follow their own trading strategies, the systematic trader typically automates an objective set of trading rules that define exact conditions under which trades will be entered, managed and exited.”
Generally speaking, the systematic trader performs better over the long haul, whereas discretionary traders have a higher ceiling. Regardless of whether an investor is a discretionary or systematic trader, they need to develop some sort of strategy and stick with it.
Proceed with caution
As discussed, trading futures can yield impressive returns. It can also lead to some pretty big financial trouble if you do not know what you are doing. The moral of the story is to proceed with caution and never stop learning.
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