How to Do Futures Trading

Futures trading is the investment style of buying or selling futures contracts. Futures contracts have been used to manage cash market price risk for more than one century in the world. Unlike a stock, which represents equity in a company and can be held for a long time, if not indefinitely, futures contracts have specific time period. Futures trading allows a market participant to lock in prices and margins in advance and reduces the potential for unanticipated loss.

Futures contracts trade in standardized units in a highly visible, extremely competitive, continuous open auction. In this way, futures lend themselves to widely diverse participation and efficient price discovery, giving an accurate picture of the market.

There are two basic categories of futures participants: hedgers and speculators. In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. The rationale of hedging is based upon the demonstrated tendency of cash prices and futures values to move in tandem. Speculators are the second major group of futures players. These participants include independent floor traders and investors. Independent floor traders, also called "locals", trade for their own accounts. Floor brokers handle trades for their personal clients or brokerage firms.

For speculators, futures trading has important advantages over other investments:

Futures are highly leveraged investments--The trader puts up a small fraction of the value of the underlying contract (usually 5%-15% and sometimes less) as margin;

Commission charges on futures trades are small compared to other investments--the investor pays them after the position is liquidated;

Most commodity markets are very broad and liquid--Transactions can be completed quickly, lowering the risk of the time delay from the decision to the execution.

Most trading objects are familiar to you--from crude oil to gold, from metal to grain, from treasury bonds to stock index.

The basic requirement for beginners on futures trading is a futures trading plan, created according to his or her financial background, trading style and trading ability and so on. The capital you should have depends solely on your trading budget. If you take futures trading as a part-time job, then investing lower amounts for small profits can be the right plan. But if you want to make futures trading for your living, then you should invest much more.

Keep in mind that futures prices are more volatile than stock prices. Remember it is margin trading and expanded more than 10 times as your normal investment. You need to ask yourself how much you can afford to lose. Be extremely honest with yourself about this, in fact, be more than honest so that you are sure to not overextend your budget.

Here are some simple tips that will help you increase your profit potential and prevent you from losing money.

1. Understanding the basics of fundamental analysis and technical analysis

When you do futures trading, it is very important to understand the difference between fundamental analysis and technical analysis. A quick explanation of the difference among the two types of analysis is: fundamental analysis focuses on the relationship of supply and demand while technical analysis focuses on price action and market behavior, especially on chart and technical indicators.

2. Trading with the trend

No matter which futures you are trading, you have to trade with the trend. As you know, the price will be changed when the supply and the demand have been changed. If no further factors occur, the trend used to be going on. However, trading with the trend is a complex principle as it depends on the trading style. A day trader may follow hourly trends as he trade according to minute changes in prices. On the other hand a long term investor or position trader may follow weekly, monthly or even yearly trends.

3. Minimizing the losses and running the profit

Minimizing the losses means quitting the trade quickly when market is against you. As no one want to quit a trade in loss, it is the toughest decision to make.

No one trading futures will want to quite a trade providing great profits. But remember to quit a trade as soon as you feel a negative trend. Meanwhile, running futures contracts when the trend is the same as whcih you wish.

4. Managing the risk

Managing the risk is most important to beginners. It is an essential practice for you to set up a stop order before you trade to evade big loss and move your stop order to preserve profit. Keeping hands off from highly fluctuating markets and investing in mini contracts, paying attention to surprise reports, diversifying trading fields are some of the practices involved.

Always monitor national and international trends, especially pay more attention to relative contracts trends, you will make a success on futures trading. Visit SoloInvest and TradingSolutions to know more.