Top Tips All Futures Traders Should Know About – Introduction
The concept of futures trading is interesting. Assume that you are a corn farmer in a village and the present price of corn is $10. Also, assume that there are a few corn millers in that village. As a key supplier, you don’t know what the price of corn will be in the coming three months. So, you talk to a corn miller who promises to buy your corn at $8 in the next three months.
When presented with such a scenario, you can say no. Furthermore, the price of corn could be more than $10. You can also accept the deal if you forecast that the price could be below the $10.
This is how the futures market works. Here are the top tips that all futures traders should know about.
Whether you are a local entrepreneur or a financial trader, planning is perhaps the most important thing you can do. You should always plan your trades carefully by having not only the profit objective but also the place you will exit a losing trade. Having a trading plan before you initiate a trade can help you minimize the situations where you are forced to make serious decisions when you are already in the market.
Like in any trading strategy, planning for exits is very important. Exits will help you make better decisions on when to move out of a loss or profit-making trade. By having a well-defined exit plan, you will be at a good position to place stop losses and take profits. So, before you enter a market, ensure that you have defined your exits in advance. Having a good risk management strategy will help you in all this.
When trading, you want to have full focus on the assets you are trading with. This is very important as you don’t want your attention divided on so many events. As a result, you want to focus on one or two trades per moment. This will help you read the right content and do the right analysis for your trades. Don’t try to diversify too much. Instead, focus on one or two trades.
As mentioned in the previous, you should not trap yourself by following too many markets. Still, you want to follow two or three assets. For example, if you predict that gold futures will decline, but it happens, potentially, your bet on corn prices will go up and rescue you from the down event. Essentially, you want to have a balanced portfolio of few assets.
- Power of Arbitrage
Futures exist because no one knows the future price of an asset. A farmer may not be able to know how his produce will sell. He can use the past performance to project the future price but as always, it might not work out. Perhaps, a new producer has entered the market without your knowledge. One way to play such a situation is to use arbitrage where you buy an asset while shorting a less quantity of it. Or vice versa. You can also buy futures of one asset and short those of related assets.
If you are a new trader, you should avoid doing so much. You should not try to invest in every asset you see on your screen. Instead, you should start slowly by trading less quantities of futures and adjusting your pace with time. As you grow as a trader, you will start doing well. You can start doing more like trading diverse assets at a time.
This is another important thing you should always do. Patience allows you to buy or short futures and wait for them to mature. Before they mature, there will be swings in the market. If you are a new trader, such swings can be a challenge. It is always hard seeing an account make losses. To make it, you must have patience. in some cases, you will close a loss-making account only for it to reverse its gains.