Introductory Steps In Futures Trading

By Author: Francisco Mandelbaum
Total Articles: 28
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Futures trading has the potential for large rewards as well as large risks. Before you invest, you need to conduct research on the chosen market using fundamental and technical analysis. You form an opinion on the market based on the analysis you have done.

Anyone who hasn’t traded in futures is going to find it challenging. When even the self-proclaimed gurus often fall flat on their predictions, things can be pretty hard for the uninitiated.

A simple step-by-step example will help you comprehend the process.

Futures trading contracts have the potential for large rewards though it carries commensurately outsized risks as well. So before you put in your money, be prepared for volatility. You could choose S&P 500, commodities, metals, bonds or forex futures.

Now, you need to conduct research on the chosen market. Traders use fundamental analysis and/or technical analysis, and it would be helpful to go into a bit of details. Fundamental analysis involves researching underlying factors that determine the price level for a certain commodity or financial asset. If you are investing in bonds, study ...
... may include the level and direction of economic activity, monetary policy of the government, supply and demand, investor sentiment and relevant news. Someone interested in futures contracts of agricultural commodities may be more interested in analyzing weather reports, acreage plantation and crop yields details, supplies of alternative grains, shipping costs, etc. As two futures markets may vary widely, it is a better strategy to focus on one or two markets.

Technical analysis evaluates prior price movements to determine future price action. Usually, fundamental analysts examine charts to conclude entry and exit points for trades. Same way, even hardcore technical analysts will take into account important fundamental news.

Once you are through the analysis, you need to form an opinion on the market. For instance, you may conclude that gold is likely to rise from the current $1765/oz. to more than $2000/oz. over the next six to 12 months. This suggests that buying a futures contract on gold will be profitable one.

Now you need to evaluate the available contracts. The standard gold futures contract covers 100 ounces, while emini contract covers 10 ounces. For a beginner, an emini contract is better as it minimizes the risk.

Another step is to choose the month in which you want the contract to expire. With futures you just don’t need to get the direction of the market right, but the timing as well. A longer contract may give more time, but is also more expensive. You need to factor in different variables and reach on a decision that you deem best.

The final step is the execution of the trade. You can buy the contract for the current price, while setting stop loss, which means that you are not willing to lose beyond a line. For instance, you may not want to lose more than 30% of your wager.

Emini futures have become popular thanks to the advantages they provide. These can be traded 24/7 on all-electronic platforms. This suits the traders across time zones who find it hard to trade during regular market hours. Moreover, it is affordable meaning the traders can enter positions with smaller trading accounts.

Futures trading education is important before you finally venture out in the market. It is a complex business and you cannot always depend on luck.

Author of this article is a seasoned futures trader providing traders useful tips for online futures trading.