So you want to get started with futures trading. Great! There are a lot of advantages to futures trading and plenty of benefits that you can get from it. But at the same time, as with stock trading, there is a certain level of risk that comes with futures trading. Although fully automated trading systems have made it a lot easier for people to engage with futures trading, there is still a level of thought that needs to go into this type of trading.
With that being said, let’s look into what you need to know as you begin with futures trading. Much of the process involves making educated decisions, exercising caution, and taking advantage of resources available to us today.
1. Understand Futures Contracts
Obviously, the backbone of futures trading is the futures contract. Strictly speaking, futures contracts are what is known as derivative financial contracts. They force the parties involved to transact an asset in some way in the future, at a set date and price. Futures on commodities are futures contracts that involve physical deliveries, while futures on financial instruments will end with cash settlements. There are also perpetual futures, which are future contracts that do not expire at any point.
Futures can be used in several different ways. At times, futures contracts are used to mitigate certain risks. If you are selling futures contracts for certain physical commodities, you may sell them to ensure that you get the price that you want for your commodities regardless of how the market may fluctuate in the future. They can therefore greatly lower risks for traders, regardless of the money management systems the traders use. Traders can also use futures to create leveraged positions. Through futures, they can also take a short position, take exposure to assets that cannot be traded directly, even through automated trading systems, and allow for price discoveries.
2. Understand Why Your Are Trading
Regardless of the money management algorithms and automated trading systems you have access to, you need to understand exactly why you are trading futures. You shouldn’t do so simply because you can and because you already trade stocks. Hedgers will typically trade futures, for example, to protect against bad future price movements.
Speculators, on the other hand, will often trade futures because futures have greater liquidity and better leverage effects. They’re also great ways of diversifying portfolios, and they often retain liquidity after trading hours.
3. Have Exit Strategies In Mind
Just as with stock trading, when trading futures you need to understand your own potential exit strategies. You can make the opposite transaction of the same shares amount, which is known as offsetting. Additionally, you can execute what is known as a rollover, which is taking a new future contract position on a future contract with a later expiration date, after offsetting your initial one. And if an active long or short position is not rolled over or offset, the futures contract can be settled at its expiration date. All of these strategies have different pros and cons and can be executed through different algorithmic trading systems.
4. Choose An Automated Trading System
Speaking of, futures are ideal for trading through automated trading systems. The high liquidity of futures, as well as their leverage effects among other things, make them perfect for trading in this manner. You need to understand the automated trading system through which you are working and make responsible decisions that will set you up for the best possible profit. From there, you should acquaint yourself with the most popular futures contracts, as these will generally be the ones that you should begin trading through automated trading systems.
Make sure that you consult with a financial advisor if you have one as you trade futures. There is a reason why there are subtle differences between the stock index futures and the stock market; they typically don’t even close at the same time, with the stock index futures closing 15 minutes after the stock market closes. Don’t treat them as if they’re the same.