New To futures trading? Here Are Some Things To Consider
Futures trading demands courage, patience, strong willpower, and a thirst for risk. In it, you can make or lose money fast. If you are thinking about getting into the futures markets, there are some things you need to understand. So before moving forward with your plans, here are a few things that you should consider first.
Define Your Trading Strategy
Trading is not an easy game, so you need to have a solid game plan. You should be able to answer all the following questions: What type of trader are you? What kind of assets would you like to trade? What is your trading plan and how do you plan to execute your strategies?
Once you’ve answered these questions, you will then have a much better idea of whether this is right for you, and if so, what kind of trading you should be pursuing that involves futures.
Learn The Basics Of Futures Trading
In futures trading, you are essentially agreeing to purchase an asset at a specified price and date in the future. You can trade many different types of assets including stocks, commodities, currencies, and even agricultural goods such as grains and livestock.
In this kind of trading, you have to pay a “principal” or “initial margin” which is a percentage of the total value of your contract. It ensures that the brokerage firms have adequate funds to pay you if you win the trade.
Determine How Much You’re Willing To Risk
Before you start trading futures, you should understand that you will be risking a certain amount of your capital for every trade. The amount will depend on the asset class you are trading, the number of contracts you’re trading, and your brokerage firm.
If you’re a day trader, you will probably be trading a very small amount of your capital, while if you’re a position trader, you will be risking a greater amount. Whatever amount of capital you’re willing to risk, be sure you can afford to lose it without jeopardizing your financial stability.
Which Asset Classes Are You Interested In?
Different asset classes have different risk-reward profiles, and you should know them well before you decide which types of futures contracts you want to trade. In general, commodities such as gold and silver, agricultural products such as grains and livestock, and energy products such as oil and natural gas are considered higher-risk products.
Understand The Risk-Return Tradeoff
All investments carry a certain level of risk, but that risk must be balanced against the potential return. In other words, if you are willing to take on a lot of risks, you should expect a high rate of return. If you are a conservative investor, you may want to avoid the highest-risk futures contracts. On the other hand, if you’re more aggressive, you may want to trade the most volatile futures contracts.
Make Sure Your Brokerage Is Trustworthy And Reliable
There are many brokerage firms out there that want to attract new traders. So before you open an account with a brokerage firm, you should make sure that they are trustworthy and reliable. Keep in mind that it will also take time and effort to build a relationship with your broker. You need to be patient, and it may take a few months before you feel confident in your broker.