I frequently talk with investors who are attracted to the opportunity and excitement of trading futures but afraid of the risks associated with the markets because they have limited knowledge of how the futures markets work. Being a 21st century investor requires the flexibility to use all the opportunities available in order to diversify your portfolio and potentially enhance your returns. With the right plan, investors may benefit from trading futures by embracing the associated risks and managing them wisely rather than running from them.
While trading futures and options can be intimidating, understanding the mechanics of the market and the associated risks can help you to gain comfort and confidence. And, with the right tools at your disposal, you can take advantage of market sectors that others may be unaware of. In an age where knowledge and speed are essential for getting ahead, using all the segments of the investment world will only allow for more opportunities to present themselves.
Getting Comfortable with the Mechanics and Risks of the Commodity Futures Market
No investor wants to put their money at risk without understanding the mechanics of the market, and the average investor often sees the futures markets as exotic and risky. Many have the attitude, “better to be on the safe side than explore something new.” Since you’re reading this article, you’re likely open to at least considering the possibility trying something new, and that’s a good thing!
Accepting and Managing Risk
Instead of shying away from the issue of risk, let’s deal with it head on. At Daniels Trading, we believe learning how to accept the concept of risk/reward and balancing your expectations is critical. We’ve even made a short 3 minute video about it, which you can view below.
Now, to gain a better understanding of many of the specific risks involved in trading futures, I suggest you review our full risk disclosure.
Understanding the Mechanics of the Futures Market
To properly take advantage of market volatility, one must understand the process of how his or her money is working. At Daniels Trading, we place a high priority on trader education, and we provide a variety of educational tools to assist you in gaining an in-depth understanding of both the decision-making and the trade execution process involved in futures trading. There is a wealth of free educational material on the Daniels Trading and CME Group websites. Additionally, contacting a knowledgeable broker can assist you in your quest for understanding the markets.
If you’re interested in learning more about futures trading, below are five excellent resources to get you started:
- Futures & Options 101 – Instant Futures Trading Lessons
- CME Group Resource Center
- Futures Trading Simplified: How to Gain Confidence and Learn the Process of Trading Commodities
- How to Make Your First Futures Trade
- Futures and Options Strategy Guide
Different Approaches to Trading or Investing in Futures
There are several ways to get involved with futures, and there is not one approach that works for everyone. Some investors prefer the hands on approach of placing the trades themselves. Some prefer the assistance of a broker to determine the trades to place. Still others find comfort in a managed account where the trades are being placed by a licensed Commodities Trading Advisor that has a documented track record. While each approach has its pros and cons, only you can decide what is right for you. Speaking with a licensed futures broker can help you find the right approach for employing your strategies. Learn more about the services offered by Daniels Trading.
Integrity of the Futures Markets and Safety of Customer Funds
Before opening an account, prudent investors want to ensure their money is safe and that the firm they choose has integrity. With the news is constantly showing stories of Bernie Madoff, credit default swaps, TAPR money, housing foreclosures, and bankrupt investments paying only fractions to investors, many may assume that the futures markets are subject to these manipulations.
Futures trading accounts are customer segregated accounts. In other words, futures accounts are not commingled with operating capital or pooled with other funds at the brokerage house. The funds are held in an account at a bank separate from the brokerage house and the exchange. Furthermore, clients have the freedom to access their funds whenever they want and are sent a statement of the activity in their accounts on a daily basis. This statement is prepared by the brokerage firm and allows the clients the opportunity to see any transactions that occur in their accounts.
Investors can also check with regulating bodies such as the National Futures Association (NFA) and the Commodities Futures Trading Commission (CFTC) to ensure the integrity of the brokerage firm. This provides increased transparency on the integrity of the firm. There are few markets or products that have the regulations that the futures markets employ. When a customer places a trade in the futures markets, he does this on a regulated exchange with competitive and transparent prices. The market does not discriminate whether you are a large bank or individual speculator. Everyone is subject to the same rules. Ultimately, this serves investors in that they can research the firm, exchange, and product to ensure that it has the standards that they are seeking.
To learn more, read the NFA’s article “The Story Behind the Financial Integrity of the U.S. Futures Markets”.
In summary, getting comfortable with the mechanics of the market, as well as accepting and learning how to manage the associated risks, are crucial steps to getting started with futures trading. Furthermore, there are different approaches for trading or investing in futures. Potential investors should understand the pros and cons of each approach so they may choose the option that best suits their needs. Finally, knowing that the commodity futures industry is regulated and funds are kept in customer segregated accounts ensures investors that their accounts are safe from outside forces, allowing them to concentrate on the markets. Armed with this knowledge, I hope potential investors can overcome their fear of the futures market and focus on taking the appropriate steps to achieving their trading and investing goals.
However, for good traders, leverage can make trading a very enjoyable experience. For great traders, leverage is what makes them more profitable than they could have ever imagined.
Basic Training for Futures Traders
This guide provides tips for successful commodity trading compiled from the advice of more than one thousand futures brokers. The top 50 of more than five thousand suggestions are included in this guide.