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How To Trade Futures

Finding sound futures trading advice can be challenging. When asking how to trade futures, you’ll get a different answers depending who and when you ask. From the very basics of what and where to trade to more taxing questions of how and how much, trading futures is a diverse business for the most part. The very fact it’s so diverse, is a huge part of why there’s such a vast amount of opportunity for a day trader. The what, the where, the when and the how you trade, may depend largely on your personality and account size.

Markets

Choosing a market or a number of markets to trade can have a colossal impact on your degree of success. It’s therefore critical to analyze several factors to help you determine a good way forward. First thing to consider is the type of market you want to trade. There are fundamental driven markets such as the 10-Year U.S. Treasury Note – this is the most responsive type of market to changes in economic and monetary policy. There are speculator markets such as Gold or Crude Oil – these markets move generally on the perception of fair price. There are also aggregated markets such as the E-mini S&P 500 – these are based on the prices of a number of underlying instruments and can be affected by a number of drivers. Speculation and fundamentals can affect these types of markets depending on the current market focus.

The next thing to consider is the current conditions of the markets you’re interested in. In the simplest of terms, any market is either trending or range-bound. Additionally, the market may be moving in a quiet or volatile manner. Depending on what has caused the current market condition, it may last for hours-days or weeks-months-years. For example, the market may be range-bound and quiet because it’s waiting for an important central bank announcement. Or it may be trending because a central bank is partaking in a program of quantitative easing. Many traders pick a single or a couple of futures instruments to day trade come rain or shine. However, certain strategies might work better than others in one type of market and market condition. This is why it’s also not uncommon to select markets to trade that currently align well with a specific strategy. Each has way has its merits and its drawbacks.

Tools

Charting and indicators are where most people get started with trading futures. However, it’s important to recognize that whatever the indicator is that you’re using, you should be looking for it to tell you something in respect to the current market condition. So for example, you might look for entries on an extreme print of an oscillator-type indicator (such as RSI or Stochastics) in a range-bound market. There are many different ways to assess a market through a plethora of technical analysis methods and indicators. Elliot Wave Theory, Market/Volume Profile, Moving Averages, Donchian Channels, Ichimoku and simple Price Action are just a few examples of methods that futures traders use to pinpoint trading opportunities.

Strategies

As you might well imagine, the strategies traders employ to trigger trades are as numerous as they are diverse. Breakout traders look for balanced markets and attempt to enter trades where their analysis suggests a continuation of the move following a breakout beyond the recent range of prices. News traders focus all their attentions on economic figure releases and key announcements or speeches that if they’re unexpected in nature, cause enough volatility for a nimble trader to profit from. Spread traders look to profit from the relationship between highly correlated products rather than the outright market in itself. For example, a trader might buy a 5 year bond future and sell a 10 year bond future in a specific ratio. There are also Trend traders. Trend traders tend to look for opportunities to trade relative to a prevailing trend in prices. So if the market is trending higher for example, they will be looking to buy on a pullback to where they perceive prices as too cheap, with the expectation that the trend will persist. There are also Faders who look for prices where the market may have a high probability of turning. Then there are the Scalpers who look for many small winning trades.

There are also two primary ways to trade any method you decide on. These are discretionary or mechanical. Different styles of trading may be better suited to either of these. Fading a market may be better accomplished when a trader has the ability to make a judgment call, whereas trend following may work well as part of a mechanical trading system. It’s also going to be dependent on the individual of course as to which method works best. Another possibility with mechanical trading is the ability to automate it – i.e. to get a computer to trade it for you.

Money Management and Consistency

Although there are many different ways to analyze and trade many different markets, one thing that’s broadly the same throughout is the importance of Money Management and Consistency of application (following your trade plan). Futures are highly leveraged instruments and accounts are margined. This means that only part of the value of the instrument needs to be put up to trade it, with even lower requirements if you don’t hold a position overnight. So for example, 1 x E-mini S&P 500 at a price of 1,800 has a value of $90,000 ($50/point x 1,800 points). But it’s not hard to find brokers offering the facility to trade this product intraday with just $500 in margin!

So diligent planning and appropriate risk controls are necessary if you’re going to make it in this game. The Probability of a persistent Losing Streak is going to be a huge factor in determining the Account Capitalization you’ll need to trade a particular market and strategy. Although the probability of several consecutive losses may be small, over many trades it becomes much more likely. It’s absolutely essential to remain true to your trade plan as much as possible. If you don’t trade in a Consistent way, you can’t expect consistent results. Consistent results give you two things. One is if they’re consistently negative, it’s much easier to see where you’re going wrong. Two is if you’re making money consistently, you can increase the number of contracts you trade and thus Scale your business.

There are many considerations when deciding how to trade futures markets. And it’s really important that you do make them. If you don’t, it’s likely that you’ll find it tough going at best. If you’re diligent enough to make sure you cover everything and treat Trading as a Business, you’ll give yourself a great chance of succeeding in this fantastic business.