Here are seven tactics to assist you become more knowledgeable about futures trading.
Success in the realm of futures trading can bring significant rewards, but mistakes can be quite expensive. Because of this, it’s crucial to have a plan in place before you begin trading. Here are seven suggestions for moving forward.
Create a trade strategy
The following first advice cannot be underlined enough: Before you take a position, thoroughly plan your trades. This entails putting an exit strategy in place in the event that the deal does not turn out as you expected.
Reduce the likelihood that you’ll have to make significant choices when already in the market and putting money at risk. You don’t want your decisions to be dictated by your feelings of fear or greed, which could tempt you to cling onto a losing position for too long or abandon a winning one too soon.
You can be protected from such mistakes by using a well-crafted trading strategy that incorporates risk-management tools like stop-loss orders, which we shall describe shortly, or bracket orders. As an illustration, let’s say you paid $20.00 per ounce for one contract of silver for December. You may set a stop loss exit at $18.00 per ounce and a profit exit at $25.00 per ounce with a bracket order. In this method, you aim to keep your potential reward of $5 per ounce while lowering your risk to $2 per ounce.
Concentrate more narrowly, but not too much
Avoid overextending yourself by attempting to track and trade numerous markets. The majority of traders struggle to stay on top of a few markets. Keep in mind that trading futures involves a significant time and energy commitment. Even the most seasoned trader may find it challenging to keep up with news, read market commentary, and analyze charts.
You run the risk of not giving any market the time and attention it needs if you try to monitor and trade too many different markets. Trading only one market could not be a great strategy, on the other hand. There can be advantages to diversifying your futures trading, just as there are advantages to doing so in the stock market.
Consider the scenario if you anticipated a decrease in gold prices but a rise in the cocoa market. You may make up for a loss with a gain if one of your expectations turned out to be false while the other was true.
Don’t floor the accelerator if you’re just starting off with futures trading. When you’re just starting out, there’s no necessity to start trading five or ten contracts at once. Avoid the rookie mistake of utilizing your whole account balance to buy or sell as many futures contracts as you possibly can. Although occasional drawdowns are unavoidable, you should avoid building a sizable position where one or two bad transactions might leave you bankrupt.
Instead, begin gradually with one or two contracts so that you may create a trading strategy without the extra stress of handling larger amounts. If you find a trading style or method that is effective, consider upping your order size. Adjust your trade as necessary.
You might also think about decreasing your contracts whether you’re a novice futures trader or an experienced trader who has run into trouble. Exchanges occasionally provide smaller versions of normal futures contracts called E-mini futures and Micro E-mini futures. For instance, the CME Group offers a smaller version of its flagship S&P 500 futures contract called an E-mini S&P 500 futures contract. Similar micro goods are available in the grain, energy, money, and metals industries.
You can gradually increase your order size once you’ve settled on a technique you feel confident using.
Think both long and short
Markets that are growing or sinking both offer trading chances. It’s in our instinct to hunt for market opportunities to buy, or “go long.” However, you can excessively restrict your trading opportunities if you’re not also willing to “go short” a market. Here’s an illustration: Let’s say a trader decides to sell December crude oil futures at their current price of $50 per barrel in the hopes of later buying them back at a profit should the futures price fall below $50 per barrel because they anticipate the price of crude oil will decline.
You can purchase or sell the market using futures. To close out your position, you can buy a contract first and then sell it. Alternately, you can first sell and then buy a contract to neutralize your position. Practically speaking, there is no distinction between the trades: Regardless of the order you sell or purchase in, you must post the necessary margin for the market you are trading. Therefore, don’t pass up chances to cut it short.
Take note of margin calls
If you receive a margin call, you probably did so as a result of holding onto a bad trade for too long. So, take a margin deficiency as a sign that you’ve grown emotionally tied to a trade that isn’t performing as expected. You might be better off entirely abandoning the losing position than moving more money to cover the call or closing out open positions to lower your margin requirement. Cut your losses, as the saying goes in trading, and look for the next trading opportunity.
Avoid becoming engrossed in market activity to the point where you lose sight of the bigger trading picture. Of course, you need to keep an eye on your available positions, working orders, and account balances. But don’t rely on every market spike or downtick. You may not only drive yourself crazy, but you may also experience little zigzags or whipsaws that at first seem frightening and important but ultimately turn out to be mere intraday blips.
In other words, strive to keep an eye on the bigger picture. Instead of attempting to trade every movement in the market, you might find success by extending the period of your trades.