Many people ask us how to make money in the stock market. If you ever asked yourself how to do it, consider trading futures as an option. Futures trading can be a bit complicated for beginners, but with the right tips and education, you can start gradually.
Here are some of the basics of futures trading with some helpful tips to get you started.
Table of contents
- What are futures contracts and how do they work
- The benefits of trading futures
- Tips for beginners who want to start trading futures
- The risks associated with trading futures
Futures trading contracts are agreements to buy or sell an asset at a future date at a predetermined price. Futures contracts are traded on exchanges and can be used for a variety of assets, including commodities, stocks, and currencies.
When entering into a futures contract, both parties agree to the terms of the contract, including the price and quantity of the asset to be traded. Once the contract is finalized it cannot be cancelled.
If the price of the asset goes up, the party who agreed to buy the asset will make a profit, while the party who agreed to sell will make a loss. Conversely, if the price of the asset goes down, the party who agreed to sell will make a profit, while the party who agreed to buy will make a loss. It’s quite simple.
Futures contracts are standardized by exchange so that terms such as quantity, quality, and delivery date are already predetermined.
Futures can be used to hedge against price movements in the underlying asset, or they can be traded for speculation purposes.
Trading futures typically requires a higher degree of capital than other types of investments, but it can also offer greater potential rewards. Because futures contracts are leveraged instruments, even small price movements can result in sizable profits or losses. For this reason, trading futures is often considered to be a high-risk activity.
However, with proper risk management techniques traders can potentially maximize their chances for success. Learn how to manage risk while trading with a professional trader.
Here are a few tips to help you get started on the right foot.
First, it’s important to have a clear understanding of what you’re buying and selling. That means that prices can go up or down between the time you enter into a contract and the time it expires. It’s important to have a handle on market conditions and know when to buy and sell so you don’t get caught on the wrong side of a trade.
Second, don’t risk more than you can afford to lose. Futures trading is speculative, which means that there’s always the potential for loss. It’s important to only invest money that you can afford to lose without putting your financial security at risk.
Third, use stop-loss orders to limit your risk. A stop-loss order is an order to exit a trade if it reaches a certain price. For example, if you enter into a futures contract at $100 per share you might place a stop-loss order at $90. That way, if the price of the asset falls to $90 per share your trade will be automatically closed and you’ll limit your loss.
Fourth, don’t get emotional about your trades. It can be easy to get caught up in the excitement of a winning trade or the disappointment of a losing trade. However, it’s important to stay disciplined and stick to your trading plan. Emotional trading can lead to impulsive decisions, which can ultimately end up costing you money.
Fifth, don’t forget to use risk management techniques. Risk management is vital to success in any type of trading, futures trading included. Be sure to set stop-loss orders and use other risk management tools to help you stay on track.
Futures contracts also come with several risks.
There is the risk of counterparty default, which occurs when the other party to the contract fails to meet their obligations.
There is also the risk of price volatility, which can lead to losses if the contract is not properly hedged.
Finally, there is the risk of regulatory change, which can impact the value of the contract. While these risks cannot be completely eliminated they can be mitigated through careful planning and analysis.
Learn how to manage those risks with JTrader and become a profitable trader!
Disclaimer: these articles are for educational purposes only. Market analysis, prices, news, trade ideas, or any other information within this site or the chatroom is not investment advice.