Tips For Getting Into Futures Trading

Tips For Getting Into Futures Trading

For many investors, the futures markets, with all of the different terms and trading strategies, can be very confusing. There are significant profits to be made in the futures markets, but it is important that you understand how the different types of markets work and how you can achieve those profits steadily. This article explains how each market works and the different strategies that you can use to make money.

  • Commodities

One strategy you can use when trading commodities are straddles. A straddle is built by holding the same number of calls (where you are speculating that the price will rise) and puts (where you are speculating that prices will fall) with the same strike price and expiration date. Basically, the idea is that you think prices will stay volatile in the future, either moving up or down.

Another strategy you could use is to buy a call option. In general, you would purchase calls when you believe the price of the underlying asset will appreciate in the near future. On the other hand, you would purchase a put option if you believe the price of the underlying asset will decline in the near future.

  • Currencies

As with commodities, you are speculating that the prices of a particular currency will rise or fall in the future when you trade currencies. One commonly used strategy to trade currencies is scalping. Scalpers try to take short-term profits off incremental changes in the value of a currency. Doing this over and over again means that your profits will keep adding up over time, giving you significant total profits when you add all the small profits together.

Generally, your time frame can be as short as one minute or may last several days. A scalping strategy requires strict discipline in order to continue making small, short-term profits while avoiding large losses.

See Also: Common Active Trading Strategies

  • Indexes and Interest Rates

Timing strategies are extremely popular with investors who trade index and interest rate futures. Futures contracts on interest rates are also very popular contracts. Two commonly used timing-based trading strategies for trading these kinds of futures are the cycle and seasonal trading.

A cycle trading strategy is applied by studying historical data and finding possible up and down cycles for an underlying asset. Two commonly used cycles for stock index futures are the 23-week cycle and the 14-day cycle. Studying the price trends associated with cycles can lead to huge gains for savvy investors.

Seasonal trading, on the other hand, is when you try to trade the seasonal effects that take place in the futures markets. Historical data suggest that many markets, sectors and commodities trade at varying levels throughout the year and show similar patterns year after year. Knowing these different seasonal trends is another effective way to make money off trading futures.

Try It Out

Getting started in the different futures markets can look intimidating. One way you can learn as you go without putting any of your money at risk is to start out paper trading. Paper trading is done by imitating trades by yourself (or with a market simulator) until you feel that you are comfortable enough to begin actually trading.

A good way to start is by concentrating on these four different areas. This will help build your knowledge as you go along without increasing your overall amount of risk. Then, as you feel that you have mastered these areas, try expanding into trading other types of futures.

Conclusion

Trading the different futures markets can be very worthwhile but provocative. For young investors, there are many different markets and strategies that you can use to be successful, including the ones discussed here. By doing your research and making sure you understand how futures work, you will have the opportunity to enjoy a great deal of success trading in the futures market.

See Also: Day Trading Tips Novice Traders Need to Know

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