Just as the name implies, futures trading refers to the practice of trading – buying and selling, that is – of a specified commodity with standardized quality at an expiration period and at a market-determined futures price. Despite its name, however, it can be easy learning the ropes especially when you have exposure to and experience with direct securities like bonds and stocks.
Well, of course, futures contracts are traded on a different platform than these direct securities, specifically in the futures exchange. Thus, the commodity being traded is a tangible asset, which is in sharp contrast with direct securities like warrants, bonds and stocks evidenced only by paper but something that cannot be touched per se. Think along the lines of sugar, crude oil and precious metals as the things being traded in the futures market.
Keep in mind, too, that futures contracts are one type of derivative contracts, which means that it is highly leveraged and, hence, highly risky. After all, very small changes in the underlying value of the commodity greatly impacts on the value of the contract itself. You will hear of fortunes found and lost just because sugar prices in Brazil took a dive of a few cents.
Remember that futures trading do not operate in just a few hundred dollars but on hundreds of thousands of dollars. If you only have a few thousand dollars to spare and it is your life savings, you might want to think twice, thrice even, before investing in the futures market.
Thus, it is very important to acquire the basics of futures trading even before you dream of raking in the big bucks on your first futures contract. These tips should help in this area:
- Use your trading system to your advantage since it will assist in making trading decisions based on quantitative analysis instead of emotions like pride, fear and greed.
- Protect yourself at all times, which can mean using sell and/or buy stops to limit losses within your comfort range and utilizing heading strategies such as buying puts.
- Stay focused. Futures trading demands focus on what is important – profit – and less on other personal matters. Well, at least, this is true when you are on the futures exchange – the lesser the distraction, the better for your decisions.
- Be open to new ideas. No trader is so knowledgeable about the market that he can afford to disregard new trends, new issues and new information. Always be flexible with your positions as the market changes.
You can always hire a financial advisor and a futures trader to carry out the transactions in your behalf. However, take note that it is still your money at stake, thus, you have the right and the responsibility to exert final control over it.
In conclusion, futures trading can be a very profitable activity if and when you arm yourself with the requisite information, exposure and experience. Beyond that, how you play the high-risk game that futures trading definitely is depends on your investment style and profit goals. Thus, plan your moves and plan them well in advance of the future.