Before beginning this short tutorial on how to trade futures it is important to point out that futures trading is considered very risky, and thus it is not for everyone. There are many ways to trade in the futures market, but before you jump in it is best to know how much risk you are willing to accept. Not only that, but when trading futures you need to have a deep understanding of the market, access to all the news that could affect your market and intimate knowledge of how futures contracts work. It is also important that you decide how much time you can devote to research and trading, as this could literally make or break your futures investing career.
In addition to the above warnings, it is important that any funds you use for futures trading be pure risk capital, that is money which you could lose and your lifestyle would not be affected adversely. With all that out of the way, if you are still interested in futures the next question that needs to be answered is how to trade futures. We give you three possible ways to participate in the futures market.
Invest On Your Own – You can open an account with a broker that offers futures fairly easy and trade on your own. It is important to note that this method offers the most risk, but it also comes with the highest potential rewards. You will be responsible for every aspect of futures trading in this scenario, including ordering your trades, maintaining the proper margin, money management, hedging, research, and analysis to determine trading opportunities. This method will require a substantial investment in not just money, but in your own time. If you can’t dedicate a substantial amount of time to the research and analysis of the futures markets you could easily fail when trading on your own.
Use a Managed Futures Account – There are brokers available who can trade futures on your behalf, taking a small management fee for his services. This greatly reduces the amount of time required to participate in futures trading as the broker will do all of the research and analysis, as well as all the trading. Typically you agree on conditions with the broker when the account is opened and he will trade based on those conditions, which typically include a profit target. Of course you are still responsible for any margin calls or losses incurred in your account.
Join a Commodity Pool – This is another option for trading futures, and it is the one with the least risk. A commodity pool is similar to a mutual fund, but is based on trading futures. No one individual owns the account, instead you purchases shares in the pool. Profits and losses are reflected based on your share of the pools funds. In addition to lowering the risk, investing in a commodity pool also allows for more diversification as the pool typically has a much larger capital base and can participate in many different markets. There is also no risk of a margin call in a commodity pool.
No matter which method you take to answer the question of how to trade futures, you always need to remember that while they do have great profit potential, they also pose greater risks. Limit yourself only to money you can stand to lose and you’ll be a much happier futures investor.