Futures Trading

Many small investors lost their lifetime saving in the stock market crash of 2008. The first choice for many investors was and is the stock market. After getting their fingers burnt during the recent stock market crash, many small investors are looking for new avenues. Investors have many choices for investing their money today.

What about futures trading? Many individual investors make a living day trading futures. However, futures trading is not for you if you are among those who take a look at their mutual funds portfolios only once a year and wonder about the returns. Risk and uncertainty goes hand and hand in money making opportunities. No gain without pain.

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If you want to take on futures trading, you will have to get out of the buy and hold investment mentality. What it means that those who can embrace the inherent volatility of the world and the markets and use it as a wealth building tool are more successful at futures trading. Those who can’t shake off the preconceived notions and discover to make money as the market rise and fall are not successful at futures trading.

Futures trading had begun in the United States in the mid 18th century. Most of the early futures contracts were related to agriculture or commodities. But futures trading didn’t have global significance until the 1980 when companies and governments embraced futures trading as financial management tools for hedging. You must know that futures trading belongs to the 21st century.

Great changes have taken place during the last many decades. Today individual investors trading futures are on a level playing filed with professional traders and institutional investors. Futures trading is the favorite pastime of the hedge fund managers. Technological advances especially the internet has transformed the futures trading landscape. Now as an individual investor you can easily compete with the hedge fund managers in futures trading.

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Futures trading is in fact a zero sum game. If you are long, your counter party will be short and vice versa. Now most futures contracts are electronically traded with online order entry and execution. E-mini products have been created specifically to appeal to the individual investors and are now standard among exchange offerings. The most popular E-mini futures contracts are the E-mini S&P futures and the E-mini Nasdaq futures.

There was an uptrend in the stock markets that lasted many decades. There were some minor downtrends but the overall trend had been upwards for many decades. The chances for sustainable trend that last for decades like that happened in the stock markets during the 1980s and 1990s are less likely. Good services and basic materials will probably undergo major price swings, up and down during the next two to three decades. The volatility of the markets is only going to increase.

Trading is not investing. Trading is not gambling. Trading is in fact speculating. The today’s world calls for a more active and even speculative investor. Speculation means you invest in anticipation of making a profit from the market movements. The past investors could afford the luxury of buying and holding stocks and mutual funds for the long term (this is what Warren Buffet did in building his fortune. He would buy blue chip stocks that had gone out of favor but were inherently sound and held them for decades) but not now. The new world calls for a trader and futures trading offer one of the best opportunities to make money by trading in volatile times.

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However, trading futures contracts requires active participation. You will have to work at it or you will be out of the game very quickly if you want to change from a couch potato to a futures trader. You need to know the futures market intimately. You should know that trading futures contracts is a risky business. Developing a winning futures trading plan can help you achieve success!

Futures trading is done by most of the people like you and me who are interested in making money in the markets. Trading E-mini futures has become popular with many individual investors apart from professional traders and speculators who also trade other futures contracts. “Buy low and sell high”, is the basic premise in futures trading as it is in stock trading. You try to go long when the prices are low and go short when the prices are high.

You will like to know what is different in futures trading from stock trading. The fact that you can trade futures with leverage on either long or the short positions introduces an additional element of risk not present in the stock market. Leverage is a risky. Futures contracts are highly leveraged and marked to the market daily. Leverage is beautiful when it works in your favor. However, it is dangerous and has a dark side. You will only come to know about it when you are caught on the wrong side of the market with highly leveraged positions. There are many ways that individuals can use futures for trading and portfolio diversification. Futures industry is well regulated and has superior financial safeguards in place to ensure trading integrity.

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Another major difference that you need to know between futures trading and stock trading is that there is no uptick rule in futures trading. This means that you can easily enter into a position to capture a downward move in prices with no restriction unlike that in the stock market where you cannot short every stock. Thus, it is as easy to sell short as it is to buy long.

Even when you are not particularly good at it, how do you manage to survive at futures trading? The answer is simple. You should have the money first to open a margin account. Then you should have the ability to develop a trading plan that enables you to keep making money in the market long enough to capitalize your next big move. How do you become good at futures trading? By learning technical analysis!

So you won’t last long in the market if you don’t have a good trading plan. And you won’t be able to trade futures if you don’t have enough money. The chances are your money will quickly disappear if you start with a small trade size.

$5,000 is the minimum with which you can start trading futures. However, in my opinion you need to have at least $25,000 in your account in order to start trading futures. You must know this thing that only 5% of the futures traders succeed and 95% of the people trading futures lose money consistently.

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Make sure that you go into trading futures contracts with realistic expectations and you understand the risks involved when you start trading futures. You can take advantage of the managed futures accounts if you are not sure how to handle the risk involved in futures trading.

So in order to trade futures, you need money, patience, knowledge and technology to be successful. Without money you can’t open a position and without knowledge you won’t know when to enter and when to exit. Trading futures contracts is truly a hybrid that uses both fundamental and technical analysis. Only proceed ahead if you have these skills in abundance.

You need to know the futures contract specifications. There are seasonal tendencies in the markets that you need to be aware of. The fundamental side of futures trading involves getting to know the industry in which you are making trades. You should also know the important reports that usually affect the industry in which you are planning to trade futures contracts. You need to keep an eye on the release of those reports.

You should determine your trading style. Are you are scalper? Are you a day trader? Are you a swing trader or are you a position trader? You will need to develop your own trading style whether it is momentum trading, scalping, day trading or swing trading. Your personality will determine your trading style. Now, the technical side of futures trading tells you what the market will do in response to the fundamentals.

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As I have said before: Learn technical analysis. Understanding candlestick charts and candlestick patterns can be a good tool in your technical analysis arsenal. Don’t try to conquer every type of analysis at once. Instead, go step by step and focus on mastering one item at a time—maybe concentrating only on chart patterns such as the candlestick patterns for instance. Establish a trading plan for getting there, once you know your trading goals.