You already recognize the potential benefits of being invested in alternative assets but you need some guidance before you feel comfortable enough to put your money on the line. Follow the five steps below to get on the right track.
1. Determine your available risk capital.
You may already have an interest in trading futures, but are these markets really right for you given your available risk capital? We refer to risk capital in this instance as money that you can afford to lose in the market. While it is everyone’s intention to be profitable, the reality is that many traders lose money in the markets. With this in mind, it is important for you to consider an allocation that would not adversely affect your lifestyle should you lose the money you are trading. Most investors consider anywhere from 5-20% of their overall investment portfolio to be a reasonable amount to allocate to futures trading. However, circumstances differ for each investor and it is important that you are comfortable with whatever amount you choose.
2. Determine how much time you can commit.
Chances are, if you have the money to participate in these markets, you are most likely a working professional or enjoying your recreational time that you have earned through years of making a living. Either way, your time is a valuable commodity in and of itself. It is important for you to make an honest assessment of how much time you can commit to developing your interest in futures trading into something that is actionable. Do you have ten minutes a day? One hour a week? Use this as a starting point and hold yourself to that time commitment just as you would for your equity investments.
3. Determine your approach.
You will have a distinct choice to make based on your assessment of time. Do I want to trade these markets based on my own research and opinions (a), or do I want to defer to a futures trading professional, such as a commodity trading advisor (CTA), to make the trading decisions for me (b)?
a) I have the time to commit to developing my knowledge of the markets and want to trade self-directed online or with a broker.
You’ve determined that you can commit a reasonable amount of time to developing your interest in futures trading and are ready to begin the quest of gaining knowledge.
Great! Follow the three steps below in order:
- Visit the CME Resource Center and get started with the “Introduction to Futures” in the Left Navigation bar.
- Subscribe to a reliable service that provides daily market overviews, analysis and recommendations. We offer a free trial to our “Insider Market Advisory”, where you’ll find all of this information.
- Familiarize yourself with the contract specifications for the markets that you are interested in. This will include an understanding of how to interpret dollar for “tick” values (i.e., $10 = $0.10 move in Gold), trading hours, and margin requirements.
(skip to section 4a)
b) I lack the time to commit to trading on my own. How can I find the right type of “hands-off” approach?
You’re not alone! As mentioned above, many investors’ obligations restrict them from putting forth the time and effort to trade the futures markets on their own. View the three videos below to get a feel for the options that exist and select the right “hands-off” approach for you:
- Trading Advice. This option includes specific trade recommendations from professional traders, which are then executed in your account by licensed futures broker. Minimums for this type of account generally range from $5,000.00 to $25,000.00.
- Automated Trading Strategies. This approach defers trading decisions to a mechanical program with a specific set of rules for buy/sell signals. These programs are usually developed by professional traders, developers, and/or mathematicians. The biggest difference between this option and Trading Advice is the absence of human emotion – fear/greed/etc. Minimum account sizes generally range from $5,000.00 to $25,000.00.
- Managed Futures. With this type of a “hands-off” approach, your funds are managed by a registered Commodity Trading Advisor (CTA) with a verifiable performance record and assets under management (AUM). These advisors typically gather a 1-5% management fee as well as incentive fees for performance. Minimum account sizes generally start at $50,000.00.
(skip to section 4b)
4. Take action.
a) Practice trading with a simulated futures trading account.
You’ve gotten comfortable with the CME Resource Center, reviewing and interpreting futures research, and the contract specifications for the markets that you are interested in. The next step toward gaining confidence is to begin practice trading based on your market opinions that are shaped by your unique observations and guided by solid market research. Sign up for a free trial to our dt Pro software and be sure to check out the video tutorials to help you get comfortable.
b) Get a trial to a product that suits your comfort.
You’ve watched the three videos in section 4b and you’ve determined which type of approach you would be most comfortable with. Now, browse the available options for third party trading advice and/or automated trading strategies for a trial. Managed Futures CTAs do not provide “trials” per se; however, your futures broker may be able to assist you in retrieving all of the appropriate disclosure documents.
5. Open your futures trading account.
By opening your account with a relationship-focused futures broker, such as Daniels Trading, you will obtain unrestricted access to services like the Insider Market Advisory, as well as many of the free trials mentioned in the “hands-off” approaches mentioned above. It is free to open the account and you can continue to gain comfort and confidence until you are ready to become a participant in the live markets.