Before trading real money in the live market, it is important to understand the ins and outs of how to buy futures contracts. In this blog, we will take a look at five keys to competent buying in the marketplace.
1. Learn the Process
The initial step in purchasing a futures contract is to send a buy order to the market. Buy orders come in several forms, with the most common being of the market, limit, and stop varieties. A buy order is used to open a new position in the market or close out an existing short position.
Upon a fresh position being entered via buy order, one is said to be “long” the market. Depending on subsequent price action, the long position may turn out to be either an asset or a liability. To properly comprehend how to buy futures, one must first understand how market behavior can make a long position an asset or a liability:
- Asset: An outstanding long position becomes an asset when market price moves above the buy order’s price. This occurs when more bids are hitting the market than asks. As a result, contract prices rise, producing gains for the long position.
- Liability: An outstanding long position becomes a liability when market price falls beneath the buy order’s price. This occurs when more asks are hitting the market than bids. As a result, contract prices fall and losses are taken by the long position.
2. Select a Method
The advent of the digital marketplace has made buying futures contracts easier than ever. To accomplish this feat, one only needs a computer with internet access or a smartphone. Ultimately, there are two ways to purchase a futures contract at market:
- Self-directed: Orders are executed independently by the trader online, courtesy of a software trading platform.
- Broker-assisted: Orders are executed with the help of a dedicated broker.
If you want to know how to buy futures, all you need to do is contact your broker. Your broker will have the information you need to set up either a self-directed or broker-assisted trading framework.
3. Understand the Risks
As we mentioned earlier, when market price drops below the buy order price, the long position becomes a financial liability. Accordingly, the trader’s risk exposure is to falling asset prices.
If left unprotected, an open long position is a potentially huge liability, and a surprise bearish move in price can destroy a trading account. However, through the implementation of stop-loss orders and prudent use of leverage, catastrophe may be routinely averted.
4. Adopt a Strategy
It may seem counterintuitive, but strategic development is way down the list of must-have lessons in any How to Buy Futures curriculum. Nonetheless, without a strategy and detailed game plan, the chance of consistently profiting from bullish price action is limited.
Tombs of strategies claim to give the trader an edge in the markets. Though a majority of such works are questionable, the good ones include parameters that govern market entry, market exit, and risk management.
When applied in a consistent fashion, a viable trading strategy promotes consistent and efficient trade. In the case of going long, it will tell you when to enter the market (buy), when to exit the market (sell), and how to manage your money (define leverage as well as risk and reward).
5. Choose an Ideal Market
After selecting a desirable strategy, it will be necessary to find a suitable market for implementation. Aside from those elusive strategies that profit in almost any market, ideal conditions are needed to optimize performance.
Below is a quick look at the general market conditions acceptable for various trading strategy executions:
|Intraday Trading||High||Extreme, High|
|Day Trading||Moderate||Extreme, High, Moderate|
|Swing Trading||Moderate||Moderate, Low|
Each type of strategy requires unique market conditions to succeed. For instance, scalping involves taking small profits repeatedly to secure market share. Thus, a scalper’s success depends upon maximum volatility and liquidity. In contrast, a long-term investor’s bottom line isn’t reliant on either; the importance of efficiency takes a back seat to correctly identifying trends in market behavior.
Learning How to Buy Futures Doesn’t Happen Overnight
The life of an active futures trader isn’t glamorous. The job description may be summed up in two words: Make money. And, regardless of strategy, leverage, or product, the only way to make money in futures is to buy and sell contracts.
To learn how to buy futures competently, check out the Daniels Trading guide Basic Training For Futures Traders. In it, you will find helpful tips and pointers from experienced futures pros.