4 tips to successfully trade in futures

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4 Tips to Successfully Trade in Futures
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Futures are used by people to speculate on the
price of a commodity or security in the future.
For example, if you think the price of coffee
will be higher next year, you could buy the
futures contract now and make money when the
price rises. Futures are also known as
derivatives because they derive their value from
an underlying asset, index, or interest rate. In
this case, its coffee thats priced in dollars
per pound. When buying futures, you dont pay
for the actual coffee, but instead are
speculating that it will cost more at a later
date. If you are t hinking about futures trading,
whether you have some experience or not, putting
in the time to read about it is time well spent.
There are a few tips and strategies that can
actually help you avoid common mistakes while
ensuring you achieve your desired goals. Here are
five tips to successfully trade in futures
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Outline An Effective Trading Plan
One of the most important steps you can take to
improve your future trading performance is to
establish a trading plan. A well-thought-out plan
will help you navigate many situations, such as
when to get in and out of a trade, and what to
do if the market moves against you. You dont
want emotions influencing your decisions by
convincing you to hold a losing position too
long or exit a profitable position too soon. This
is where having a clearly defined trading plan
will come to your aid. Similarly, for example,
if your goal is to generate supplemental income
from trading, then it may make sense to focus on
short-term strategies that produce more frequent
trades while keeping capital requirements low.
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Perfect The Art of Shorting
Shorting allows the investor to hedge against a
bearish market, thereby reducing your risk
exposure to it. It also allows traders who are
bearish on certain instruments or markets to
make money on their views without having to
invest in options and derivative strategies. The
key difference between a long position and a
short position is that in the former, you profit
only if the price rises, and in the latter, you
profit only when the price declines. Short
selling is an integral part of futures trading.
For example, if you are an intraday trader and
believe that the price will decline on a
particular stock or index, you can initiate a
short position in that stock or index to profit
from it. Or if you have bought some shares at a
higher price and want to limit your losses or
even profit from them by selling them off first
and buying them back later at a lower price
(this is called short covering), then too you
need to initiate a short position in that
stock/index. With a thorough understanding of
shorting and how you can leverage it, you can
unlock a whole new world of opportunities to
solidify your portfolio with greater returns even
when the market isnt having its highs.
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Have A Concentrated Approach
With futures trading, more choices dont
necessarily mean better returns. In fact, it can
often be the opposite. This is why while you
should focus on diversification, you shouldnt
spread yourself too thin either. Thats the
advice most experienced futures traders have for
new traders. Instead of trading in too many
markets, keep your focus on one or two markets
that you really know well and then apply
disciplined trading to them. Regardless of how
many markets you follow, make sure youre keeping
tabs on only those that really matter to you.
For example, if youre interested in trading
metals such as gold or silver but know nothing
about agriculture commodities such as soybeans
or corn, it makes little sense to spend your time
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Be Careful With The Margin Calls
Brokerage firms issue margin calls with the
intent of protecting themselves against the
possibility of further losses, or even bankruptcy
since there is a real risk that additional funds
may need to be deposited to maintain open
positions. In other words, a margin call is the
brokerage firms way of taking steps to limit its
risk. Keep in mind that your broker will
typically require you to promptly deposit
additional funds or securities into your account
to meet a margin call, as well as deliver money
if you have open short positions. If your
account falls below minimum maintenance
requirements, it can be liquidated by your
brokerage firm without prior notice. Of course,
this means the value of the securities in your
account will be sold at whatever price they can
fetch regardless of whether its above or
below the purchase price. If youre facing margin
calls, its a clear indication that you have
stayed with a losing trade for far too long than
what you should have. In such a case, taking
margin shortfall as a sign to exit the position
is a good idea. Cutting your losses, which can be
difficult especially if youre emotionally
attached to the position, is essential to keep
your portfolio healthy.
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Final words
If you are completely new to the futures trading
market, now is a great time to get started. With
some simple research and adequate planning, you
can develop a sound strategy and put it into
action to achieve optimal success. Remember,
while futures trading is a complex activity, some
of its core concepts are not as difficult to
understand as people imagine. The purpose of this
article is to help you understand some essential
tips and insights so you can best use futures in
your portfolio. Now, take a step ahead and start
trading futures.
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