Should You Trade Futures?

Most traders looking for something to trade generally have 3 choices: stocks (both common and options), futures, or currencies. There are other instuments to trade also, such as bonds and a few other exotic things - most of these are out of reach of the average trader. The most well understood trading vehicle is stocks, and least is probably currency pairs. Most investors and traders have heard about hte futures markets, which are not too hard to understand with a little bit of research.

First off, futures inherently have leverage far beyond stocks. Most stocks you can get 2:1 leverage overnight and 4:1 intra-day for day trading. Futures are leveraged by default because of how they are constructed. This is a double edged sword. Any trader can use futures to get a good rate of return with far less money than it would take with stocks, often just a few thousand dollars to start. Stocks this is not possible (unless you delve into the murky waters of penny stocks). This causes returns to be amplified UP (gains) and DOWN (losses). It is not that uncommon to have $5000.00 in your account and on a single trade make or lose $300-$500 depending on which future you trade - a 10% return (or loss!) on your principal in the account. If this type of risk makes you nervous - then futures are not for you.

A second point to remember is that futures lead the stocks through the pushes higher and the seloff's. This can create volatility which means lots of trading opportunities. With this type of behavior and volatility comes the forced ability to think quickly. You often times only have a few seconds to get an order in or you will miss the move. It is also a good trait to develop the ability to anticipate an direction and have orders in ahead of time. Again, this requires skill and fast thinking. If this is not your strong suit, or you are very analytical, futures day trading or swing trading is probably not for you.

Lastly, you must be able to assess risk and stop levels quickly, almost second nature. You should not enter a position long or short and then subsequently try to figure out your stop and target placement. You should already know this before entering the trade. Since futures are leveraged a lot, you should always assess the stop first (read risk level) and determine the odds of that stop getting hit in the next 10-15 minutes BEFORE actually placing a trade. Why 10-15 minutes?? Most trades people do in the futures market on average only last this long, unless they are swing plays. Most traders choose not to take futures overnight because of the gap risk and the additional overnight margin required to do so. Traders close out positions at the close of each day.

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