The futures marketplace is a diverse arena providing traders and investors with a broad spectrum of viable opportunities. However, the most suitable product, market or strategy depends on each individual’s resources and financial goals. In the case of long-term investors, there are three primary reasons for engaging the futures markets:
- Asset diversification
- Risk management
- Speculative opportunities
Ultimately, there’s no definitive guide on how to become a successful trader or investor. From the standpoint of the investor, preserving wealth while pursuing reward within a variety of capital markets is often the ticket to prosperity.
Asset Diversification and Risk Management
One attractive characteristic of the futures markets is the broad spectrum of asset classes that investors may address. Currencies, debt instruments, equities indices and commodities are a few examples. No matter your interests ― whether it’s stocks or soybeans ― futures provide an ideal path for the achievement of your goals.
Risk management is vital to wealth preservation. For those market participants in it for the long haul, such as professional investors, mitigating various forms of risk are an integral part of any comprehensive strategy. The first rule of learning how to become a successful trader is akin to that of investment: preserve your risk capital!
Investors frequently trade futures to enjoy the benefits of portfolio diversification. Because futures are derivative products, the process of price discovery is a bit different than holding physical commodities, stocks or bonds. Over a contract’s life span, values can change dramatically in relation to the cash value of the associated underlying asset ― this feature allows investors directly hedge against three types of risk:
- Financial: Limiting the negative impacts that inflation can have on wealth is a key aspect of successful investing. Accordingly, trading commodity futures can provide insulation from the dreaded “inflation monster.”
- Systemic: An unexpected downturn in an entire industry or economy is known as systemic risk. Taking long positions in safe-havens, such as gold or being short equities indices futures, are steps that investors may take to ensure that a surprise market meltdown will not destroy the portfolio.
- Production: Large-scale producers, such as those found in the Ag or energy sectors, often use futures contracts to lock in profitability for deliverable goods. By doing so, they can eliminate the negative influence of unforeseen pricing volatility in cash or spot markets.
In finance, there’s an old saying: “it’s not what you make, but what you don’t lose.” When it comes to actively preserving wealth and growing capital, accounting for risk in its many forms is a necessity.
Perhaps the largest difference between traders and investors is the time horizon involved with conducting market-oriented activities. Investors operate on much longer time frames than traders, typically measured in months, years and decades.
It’s due to this philosophical difference that the basic tenets of how to become a successful trader do not exactly translate to investing. However, one essential truth is the same for traders and investors alike: spotting and capitalizing on opportunity is the key driver of success.
Many traditional investors find the futures markets attractive due to an abundance of opportunities. The consistent presence of pricing volatility, robust liquidity, and low transaction costs make various futures products ideal venues for avid speculation. In many cases, the futures markets furnish participants with superior modes of investment over ETFs and conventional asset acquisitions.
Does Anyone Know How to Become a Successful Trader or Investor?
Figuring out how to become a successful trader or investor requires determination, discipline and experience. The answer does not come overnight but over time.
For more information on how the futures markets can complement your financial game plan, check out the professional advice available at Daniels Trading. Whether seeking council from a certified broker or third-party advisor or educator, Daniels Trading has you covered.