Traders who are new to futures can take steps to become acclimated to this exciting market.
Ensuring mental preparation, finding the right trading technology, testing strategies, starting out small, keeping a trading diary, and observing the experiences of seasoned traders are just a few techniques new traders can (and should) employ before starting their journey into futures.
Educational resources are becoming more readily available for new futures traders, with the Futures Institute being one example. Developing a strong fundamental understanding of the futures trading process is as important as recognizing the associated risks. Know your risk appetite and familiarize yourself with the risks of futures trading. Be aware that futures trading is a zero sum process; for every winning trade there is a losing trade out there. Determine when you will exit a trade before you are even in a position, decide how much you are willing to risk on any single idea, and plan for what you will do if an unexpected event makes the market move quickly and sharply against your position.
Futures trading allows for margin trading, a feature available but not as common in stock trading. It is important to gain familiarity with the implications of margin trading and the implications of leverage. Ensure your account has enough money so you only risk a small portion on any one trade, then concentrate on the process of trading rather than worrying about increasing your account balance.
The right brokerage and technology will be your partner on the futures trading journey. Conduct your due diligence in researching the right futures trading platform and be sure to consider the costs: commissions and fees as well as technology costs eat away your bottom line. What offerings are available that have your best interest as a trader at heart? Approach trading as if you were a manager of a business: any business owner will keep an eye on the overhead and look for ways to trim unnecessary expenses.
Seek a system with essential tools as you won’t need all the obscure bells and whistles. Make sure that the technology you settle on offers a cohesive experience across all devices. Most people these days use multiple devices in other areas of life, placing orders for goods from their phone and checking the order later on from, say, a tablet or desktop, so why should futures trading be any different?
The trading platform you select should also offer the ability to simulate trades. Plan your trade and trade your plan, but first test it out. Trading simulation is used by all levels of traders - from beginners to experienced, from retail to professional - so take advantage of testing your strategies first.
Test strategies and risk management ideas in a risk-free simulated trading environment before going to a live market environment in an effort to protect your capital. Be prepared to manage emotional responses that could either discourage trading or produce overconfidence. And be sure to follow the leaders; read up on the advice that experienced futures traders extend to new traders.
There are many futures contracts to choose from but which ones are right for you? There are four criteria you need to bear in mind when choosing a market to trade: volatility, liquidity, contract size, and margin requirement. The market should be something a trader wants to learn inside and out, so if you don’t want to know about interest rates and yield curve, for example, the T-bonds and T-notes are not a good choice. Select a product that interests you and begin with it.
Another consideration is that mini-sized futures contracts provide a lower-barrier into the markets than full-sized contracts. The mini markets can be a good vehicle to pave the way into futures markets participation. Typically, a smaller investment is required and smaller contracts mean smaller margin requirements. For example, to trade one full-size gold commodities contract in 2015 would require a margin of $2,200 to day trade or $4,400 to carry a position overnight, while a mini-gold contract margin would only be $605 to day trade or $1,210 to carry overnight. Check volumes for each contract. Sometimes the most volume is traded in the mini contract, like with the e-mini S&P 500, but sometimes the full-sized contract is the place where the most trading happens, like with crude oil and natural gas.
Always keep track of your positions. A good way to be able to assess your strengths and weaknesses over a period of time is keeping a journal of your trading activities and to review those entries periodically and commit to applying the lessons learned from these experiences to a trading plan going forward. As Nick McDonald of Trade with Precision had suggested, taking screenshots when trades are placed could also be helpful for reference. Journaling apps such as http://tradingconsistently.com/ are available for traders, so tap into the resources at hand and document your journey.