Before you start trading futures, it is essential to think about the following factors:
You would need to have an account with a brokerage firm before you start trading futures. In addition to that, there are only a few choices to pick from when it comes to brokers. You can review some of the options on DayTradeReview.com.
You can select a full-service broker or a discount broker. If you are in dire need of advice and thorough service, then the first option might be the right one for you. However, if you do not mind the “do it yourself” method, then a discount broker makes more sense. That way, you can still have some security while paying for a lower commission and smaller fees. The choice is yours, and you should make it while considering your needs and preferences.
If you are already using the services of a brokerage firm, you could try to open a futures account with them. However, not all brokerages have that option. Nevertheless, there is a chance for a reasonable price. Another option is to find a firm which specialized in futures trading.
Before you choose one, make sure that you do proper research on all available firms. That is especially important if you do not know certain brokers. Before asking for their services, request to see commission rates, types of trades they handle, as well as the level of executions they have already provided.
Furthermore, knowing the margin requirements is also essential, as well as identifying which software they use and how good their customer service is.
Before you delve even further into the futures market, you have to decide on the category. In the stock exchange, there are multiple industries. Similarly, on the futures market, there are many categories you can choose from.
However, it might be best to start with something you already know. For example, if you have previously participated in the stock exchange, you can begin with equity indexes for your futures trading.
When you choose your category, then you can think about which particular instruments you want to trade. Each group has a variety of futures contracts, and it is always best to stick to what you know.
For example, if you are familiar with energy, then you can choose crude oil, electricity, or maybe coal.
Crude oil futures are one of the most popular ones, and you can get them from the CME. There, you can find a complete product list and the requirements for your futures contract.
Trades you would like to make
There are many strategies you could use, but here are some of the most popular ones you should know about:
Buying or selling a futures contract
This is a good place to start if you are just getting to know the futures market. There are two types of trade here: buying a contract to go long or selling a contract to go short.
The first option means that you can expect gains from market rises. There is a slight risk, but your losses are limited to $0 if the trade goes against you.
The second option means that you want to profit from a falling market. Where the price gets where you want it, then you can repurchase the contract and cover what you have borrowed from your broker. However, this option involves more risk, and it can lead to significant losses if the price keeps going the wrong way. Still, this is something you can manage by using a protected stop-loss order.
This strategy requires you to enter a long and short position at the same time. That way, you can make a profit from the price difference between two contracts. At the same time, you are hedging yourself against the risk.
Hedging means that you sell a futures contract so that you can offset a position you hold in the cash market. For instance, if you have a significant portfolio of stocks, and you do not want to sell them for tax reasons. Instead, you could sell S&P 500 futures and protect yourself against a stock market decline.