There are ample opportunities for the average American to invest. There are stocks, bonds, mutual funds, real estate, precious metals, etc. But when it comes to maximizing leverage and doing more with less, futures trading is by far the most appealing option.
What is Futures Trading?
A futures contract is essentially an agreement to buy or sell an asset at a future date at an agreed-upon price. Everything from oil and gold to orange juice and corn can be sold on futures contracts.
As NerdWallet explains, “Futures contracts are standardized agreements that typically trade on an exchange. One party agrees to buy a given quantity of securities or a commodity, and take delivery on a certain date. The selling party to the contract agrees to provide it.”
Anyone can trade futures. Investors, speculators, and business owners are all major players in the purchase and sale of futures contracts. They allow the latter individuals to protect against the possibility of severe price swings. (For example, a farmer can purchase a futures contract on corn to mitigate the impact a severe drought could bring.)
Individuals and speculators, on the other hand, don’t actually have any interest in the underlying product. They simply treat it as an investment.
4 Tips for Getting Started
Trading futures, as with any other investment, comes with a tradeoff between risk and reward. Here are some things you can do to minimize the former and maximize the latter:
- Understand the Basics
One of the most attractive perks of trading futures is that it allows an individual to enjoy large gains with small investments (thanks to high leverage). However, this also means the possibility of losing money is more severe than with a traditional investment in the stock market.
“The greater the leverage, the greater the gains, but the greater the potential loss, as well: A 5 percent change in prices can cause an investor leveraged 10:1 to gain or lose 50 percent of her investment,” NerdWallet mentions. “This volatility means that speculators need the discipline to avoid overexposing themselves to any undue risk when trading futures.”
Don’t trade futures until you’re totally comfortable with the concept of leverage and how it can work for you or against you.
- Choose a Trading Platform
One of the keys to success is to choose the right futures trading platform. There are plenty of options, but you should look for the one that’s the right fit for your needs. RJO Futures encourages people to choose a futures trading platform with the following five features: (1) ease of use, (2) practice account, (3) clear order types, (4) risk management tools, and (5) access to support (when needed).
It’s also important that you think about usability. While not as important as the technical aspects and system support, you should also consider things like intuitive navigation and aesthetic appeal. The more comfortable you are with the platform, the more likely it is that you’ll find it efficient.
- Set Stop Loss Limits
As an amateur/inexperienced futures trader, you should never place orders without also setting a stop loss limit to protect yourself against unnecessary losses.
A stop loss limit is an instruction that you file with the broker to buy or sell the contract if – and only if – it reaches a certain price point during a specific trading session. This limits both your losses and your gains, which will almost always benefit you in the long run.
- Study What Others Do
The best way to learn how to trade futures is to study what other successful investors are doing. The more you learn about different traders, the clearer the picture will come. You don’t necessarily want to subscribe to one theory or philosophy. Instead, it pays to soak up as much knowledge as you can and apply these insights across the board.
How Will You Proceed?
Do you feel like trading futures is something you could be interested in? Or are you better off exploring other investment opportunities? Nobody can make the decision for you. It’s up to you to use your best judgment and proceed with caution. As long as you do your due diligence and put the right safety mechanisms in place – such as stop order limits – you’ll be fine.
Learn from those who’ve been there before and treat each loss as a learning opportunity. The more you prepare, the better your results will be!