5 Tips and Strategies to Become a Better Futures Trader

Futures contracts, or futures trading, are agreements in which an investor will buy or sell a defined asset at a future date for a price that is previously agreed on by both parties. Futures are in a class of products known as derivatives, due to their dependency on another asset to determine their price. Whether this asset is stocks, bonds, or commodities, it is important to fully understand all aspects of your chosen asset class prior to futures trading. Before you begin, here are five tips and strategies to get you started. 

Diversify Your Portfolio  

Some commodities and asset classes are naturally occurring. These organic assets can include items that can be harvested such as wheat, corn, and flour, or items that require mining or drilling like oil, gas, gold or aluminum. These commodities are known as soft commodities and hard commodities respectively. Physical commodities such as these are far more volatile, meaning they are riskier investments as they are more prone to supply and demand. For example, if there is a particularly bountiful wheat supply in a given harvesting season, the supply will rise and the demand, as well as its value, will fall. Conversely, the demand and value of wheat may go up in the event of a naturally occurring flood or drought that may affect crops and future supplies. 

When choosing which commodities and asset classes to invest in, it is important to consider your choices and their relationship to each other. If you have chosen to invest in all tangible soft commodities, you are at risk of naturally occurring variables like the weather patterns severely affecting your income. It is vital when choosing your asset classes to choose options that are negatively correlated to each other. Negatively correlated assets will typically not move in the same direction at the same time. This could be because they are not involved in the same market, not vulnerable to the same risks, or a number of other reasons. As a futures trader, it is essential to diversify your portfolio with assets that will balance each other. If a more volatile asset in your portfolio begins to decline, you will have another asset to rise and make up for the deficit. 

Study Your Assets 

Before choosing your assets, make sure you understand them inside and out. Study the price movements that these assets have historically had. Learn more about the surrounding market and what typically causes these increases and decreases. Most importantly, learn what type of relationship your chosen assets will have with each other. It is important to consider liabilities such as supply and demand dynamics, how price patterns are affected seasonally and be aware of any legislation in place that may influence the price. 

Stick to Your Strategy

Develop a defined trading strategy and stick to it! Your trading strategy for buying and selling should be based on your specific objectives for investing, risk tolerance for highly volatile assets, time and tax implications, etc. Once your strategy is developed, don’t abandon it. You know what they say: If at first, you don’t succeed, try, try again! Your system may take some time to show a promising return, but this does not always mean it is not a sound one. Allow your system to fully execute before measuring its success and deciding to reevaluate. Often times, the constant shifting of strategies alone is enough to lead to significant losses, as they are not being allowed enough time to fully execute before they are terminated.

With this in mind, a good futures trader must also know when it is time to simply cut their losses and move on. As a futures trader, you must measure and evaluate loss. Often times these losses can be simple setbacks that may lead to small and manageable losses. These minor setbacks may turn around if you stick with them. However, if left unchecked, these minor and manageable losses can lead to devastating ones. By learning this distinction, you will know when it is in your best interest to terminate the trade or not. If you are unsure, try setting a “stop-loss”. A “stop-loss” is a predetermined threshold that you can set prior to beginning your futures trade. If this threshold is crossed, you will be able to terminate the trade and avoid any serious losses.

Stay Focused, Stay Updated and Stay Informed

Futures trading requires that its participants give their investments their undivided attention to be successful. The various markets for futures trading are constantly changing, and ever-evolving. If you are a futures trader, it is vital that you are staying updated as these changes occur. As conditions change, new information arises and new strategies are being developed. For the best success, stay informed and keep your strategy up to date to match current market trends and analytics. As a futures trader, it is easy to be left behind if you are unwilling to adapt.

Use Your Resources

In the digital age, it is easy to find a wealth of information on almost any subject and futures trading is no exception. Futures trading requires its participants to be extremely knowledgeable and up to date with the current market, and their assets. Utilize the information all around you to gather information on your trade, and stay updated. Cannon Trading will help you to get started with a professional futures broker. Our professional team will help to advise you on which platforms and which investments are right for you. We will then help to advise you on all of your trading needs and questions when they arise with our extensive background and knowledge of futures trading. Don’t go it alone, start your futures trading journey with expert assistance from Cannon Trading. 

Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources.