4 Things To Know Before You Trade Futures

Trading futures can be a very rewarding activity, but just like the stock market it carries some big risks and demands a lot of your attention if you want to succeed.   Predicting future prices can be even less predictable than predicting the rise and fall of stock values, so if you want to enter this market you need to be careful.  Technology has done a lot to change how the futures market works, but the following advice is just as relevant today as it ever was.

1. Plan Everything

Once you enter the futures market, the situation can change in the time it takes to go to the bathroom.  However, if you react to things the instant they happen you’ll make a lot of mistakes and end up letting the crowd drag you along.  That’s no way to make a profit in futures, so take some time before the market opens or before you buy anything to plan out what you’ll do if the market shifts.  What if the value drops?  What if it goes up?  Planning ahead will keep your emotions from making your decisions.

2. Always Use A Stop Loss

When the value of a future keeps going down, you should always set a point to bail out automatically.  While you’re in the moment, it’s too easy to get caught up in the changing numbers and hope that a dropping number will soon recover.  Setting an automatic stop-loss order will get you out of a bad situation, and while you may regret it when a future recovers, you’ll usually come out on top by using an automatic system.

3. Keep Your Eye On The Ball

Whether you’re trading futures, trading stocks, or investing directly in companies, it’s always important to make the most of every opportunity.  However, while that means looking for new opportunities, it also means keeping your attention on the opportunities you’ve already invested in.   When you’re trading futures, you need to pay attention to market changes, industry announcements, and weather reports.  For most traders six to eight markets is a full-time job, so don’t spread yourself too thin.

4. Stay Patient

The value of futures can go change instantly while trading is open, and it’s all too easy to get caught up in the day-trade market with its constant buying and selling.   However, if you want to make a solid profit you need to focus on long-term values and goals.   A few dips here and there won’t make a big difference if the future value eventually hits the number you want, but they’ll make a big difference if you let them scare you into trading early.

There are plenty of other skills you need as a futures trader, so keep researching both the futures market and the kind of attitude it takes to succeed.  Just like stocks, trading futures isn’t for everyone, and there are going to be times you make a mistake and lose money.  However, if you stick with it, if you learn how the markets and the climate works, you can make a lot of money on futures.

Learning About Commodity Futures Could Benefit Your Portfolio

Commodity futures used to be inaccessible to anyone besides professional traders. However, in recent years, the average trader has gained access to commodity exchanges, and, accordingly, commodities futures. Unfortunately, many investors still choose not to trade commodity futures. Trading commodity futures could prove monumental for your portfolio. It’s an investor’s best interest to take the time to learn about commodity futures.

Why You Should Learn More About Commodity Futures 

There are two primary reasons why even the most casual of investors could benefit from learning about commodity futures. First and foremost, equity investors now have more access than ever to futures in the ETF market. Not only does futures exposure come from exposure to commodity-specific ETFs, but it also comes from alternative ETFs.

Secondly, commodity futures are an excellent form of portfolio diversification. Commodity markets operate under basic economic principles where supply dictates demand, and so forth. Commodity markets are incredibly stable and are far less volatile than other securities futures. Additionally, experts view commodities as an underappreciated asset class, providing ample opportunity for long-term growth and diversification.

Basics Of The Futures Market

If you are an investor who is used to handling equities and options, there are a few things you’ll need to understand about the futures market. Most important is the fact that futures are not an asset. This is one of the most common misconceptions about futures. Futures are a contract that gives the investor the right to purchase or sell an asset at a later date.

Understanding The Futures Market 

One of the primary differences between the futures market and the equity market is the use of the word “margins.” Investors are taught to avoid margins in the equity market because they represent leverage, which typically serves as a trap for a poor investment.

Margin, regarding the stock market, means that the investor has taken out a loan so that they can increase their exposure to a particular stock. If the stock fails, the investor will not only be out the principle but the interest accrued on the loan as well, resulting in an more significant loss.

However, margin, regarding a futures contract, represents the amount of money that investors deposit into a clearinghouse. Typically, clearinghouses will limit the Initial Margin deposit to less than ten percent of the rice of the future. Furthermore, clearinghouses require both buyers and sellers to deposit their margin into the account, which helps mitigate long-term risk as both entities will be able to close out their position.

Another critical difference in the futures market is how contracts are settled. Futures investors have the option to:

  • Offset their position as the expiration date approaches
  • Convert the agreement into a cash settlement
  • Deliver the commodity

The exchange handles any cash conversions or delivery, although these outcomes are rare. However, the fact that owners could offset their position provides them with significant flexibility. Offsetting can help reduce exposure and the likelihood of taking a loss, which is why futures should serve as part of any long-term investing strategy.