Quick Futures Trading Tips

Reviewed: November 17, 2014
By FinanceWeb

Preparing to Trade Futures

Three points for the beginner to keep in mind when preparing to trade futures are margins, knowledge, and training. Many people have bought and sold stocks for a profit. Trading futures is similar in form; one takes an initial position and moves to an advantage to complete the transaction. Beginner futures traders should keep in mind that unlike the stock market, one trades futures on margin. The initial deposit requirement covers only a small part of the value off the contract. One can gain many times greater than the risked funds, and one can lose more than the deposit amount. Second, knowledge is an important asset in futures trading and it applies to all kinds of futures including commodities, currencies, and financial instruments. This knowledge base includes awareness of political developments and world events, because the global markets can be influenced by news and events anywhere. Third, paper trades or simulator trading is an important step. It is important to continue until one can succeed in real time nearly all of the time.

Accounts and Risks Management

The type of trading account and trading arrangement is a factor one must consider carefully. An individual trading account carries all of the benefits and risks of trading on margin. Profits can grow quickly as well as losses since a small deposit or margin, can control a much larger contract through leverage. For many new investors, a broker account is helpful so that professional advice can add to the tools available for selecting positions. Additionally, a pooled approach offers protections as one can invest and participate in profits of a pooled investment group.

Cycles and Seasons

Investors should consider two elements of futures trading when developing strategies, business cycles and seasonal patterns. Cycles occur in many businesses and knowledge is the key to finding ways to profit. For example, when droughts occur many products go in a lean cycle and prices and availability become factors for an investor to utilize. One gains seasonal trading skills by knowledge in a commodity or other category. Some commodities have demand links to seasons. The classic case is crude oil. In the onset of winter seasons in Northern Hemisphere nations the demand for heating oils and natural gas rises. Refineries may shift production away from other products to provide more kerosene. This seasonal variation affects all oil markets. Crude prices may rise as temporary shortages may occur if particularly cold weather prevails. These factors can help predict price changes and directions for future contracts.

Puts, Calls and Straddles

Puts are contracts that take a short position. They offer to sell a commodity at a specific price within a defined period. Calls are contracts that seek to take a long position and buy a commodity. Investors use puts when prices may fall, and calls when they may rise. Strategies use puts and calls, and sometimes in combination. Referred to as a straddle, one can use puts and calls with the same strike price and date. If the commodity moves up above the strike the investor profits, if it falls below the strike the investor buys it on the spot market and sells it through the put option.

Protect Profits by Scaling and Orders

When an underlying commodity value and the contract price create a profit for the investor, experts advise capturing the profit immediately. Many investors have an instinct to let a profitable situation continue in hopes for more or greater profits. To take the entire profit, one can use a stop loss order which will lock up a profit and close out the transaction. Another strategy is to take some profit immediately and watch the trend. The danger, of course, is that the future direction of the commodity can change and destroy the profit or create a loss.