Futures trading can be a volatile and sometimes even frustrating business, but there are ways to make it easier on yourself by paying attention to some key tips. If you’re new to futures trading, these tips will help you learn the ropes of the trade.
Three tips for futures trading
When learning any new skill, it’s helpful to understand how things work before diving in full force. Here are three beginner futures trader tips that can help you know what goes into making a good trade and help you develop your style in terms of when and why you should buy or sell specific securities.
There is more to just buying and selling when it comes to trades, so reading up on different aspects of trading can be helpful, especially if you’re new. Decide your goals and how much time you have to devote to learning about trading before choosing a style that works for you.
Identify Your Trading Style
There are different ways to make money in the futures market, whether through scalping, butterflying, hedging or trend following. Determine which type of trader you are by asking yourself questions about why you want to trade and how successful you feel at picking the right assets. This will help determine how long exactly it takes for you to close trades, as well as other factors involving your personal preferences. Always monitor any changes in your strategy over time because this will also affect how successful your trades are.
Monitor Your Trading
It’s important to keep track of your trades, so you’ll know where you’ve gone wrong if things aren’t going well. Find a software program or website that allows you to do this and follow the performance of your trades over time to make better decisions in the future. If you notice any patterns, such as closing specific trades too early, try using this information to improve by exiting said trades later when it makes more sense.
Products offered in futures trading
The three most essential tips for a beginner futures trader revolve around products offered by your brokerage firm: stocks, commodities, and currency pairs. Before diving into actual trades, you must understand what each product measures and how it affects price action.
On the equities side of things, you will find products like S&P 500 futures (SPX), NASDAQ-100 futures (NDX), ETFs like SPDR Gold Trust (GLD) and popular stock options contracts like Apple (AAPL), Google (GOOGL), Facebook (FB), Netflix (NFLX), etc. These are all great products to trade, but they often lack liquidity compared to what you can find on similar foreign instruments.
In commodities, things are a bit simpler. You’ll find products like crude oil futures (CL), gold futures (GC), and industrial metals like copper futures (HG). These types of contracts measure a physical good whose value changes with supply and demand in the marketplace. Currency pairs make up the rest of your brokerage firm’s product offering.
Currencies are interesting because they don’t have a physical form and do not entail intrinsic value like commodities or equity securities. The price of currencies is derived from their relative buying power compared to each other, known as purchasing power parity (PPP).
This means that most currency pairs are considered risk-off instruments; they rise when risk appetite increases and decline when it falls. This makes them ideal hedging instruments for traders who hold positions with high volatility levels or want to protect themselves against unexpected events, like an emerging market sovereign defaulting on its debt obligations.
If you are interested in futures trading and new to trading, we recommend using reputable online brokers like Saxo Bank and sign up for a demo account to practise your trading strategies before investing real money. Not only do Saxo Bank offer the lowest commission, they also offer excellent customer service.