Tips and Strategies

Starting out as a futures trader is a big step for anyone to take, even if it’s just on a part time or ‘hobby’ basis. Investing your own money is a serious game, and the rewards are potentially very sizeable if you both enjoy trading and get a firm grasp of the necessary steps to success. As an inexperienced trader, you will definitely make mistakes, and probably a few costly ones at that, but so long as you can afford to bear the brunt of those errors and you’re prepared to learn from your mistakes, the learning curve shouldn’t be too steep. Here are a few tips to take on board that should help ensure you skip over some of the most common mistakes new traders make when trading futures.

Over-Leveraging

The classic mistake of traders who are new to the concept of leveraging is adopting positions that are unnaturally leveraged beyond a sustainable point. Leverage works both ways – rampant gains and rampant losses, and if you don’t understand the implications of even tiny fractional market movements on the value of your positions you can quickly find yourself over-leveraged and in serious trouble.

Take care to understand exactly how your trade could turn out if markets move 1%, 5% and 10% against you, and make sure you have stops in place to prevent anywhere near that amount of damage. Remember that over-leveraging can destroy your trading account and ruin otherwise solid positions – don’t get greedy.

Finding Your Trading Discipline

Discipline is always a key factor when it comes to trading, and never is it more central than with the futures market. If a futures contract is losing value and deadline day is expiring, the chances are high that you should cut your losses. Sitting it out and awaiting a recovery isn’t always the best tactic, particularly with decaying instruments such as futures contracts, so it’s important to find the right balance and to acknowledge when damage limitation might be the most sensible course of action.

Managing Risk Exposure

Managing your risk is key to being a successful trader, whether it’s through hedging positions against other, complimentary trades or in position stops and indeed trailing stops to cut out much of the risk profile. Bear in mind that if you hold your futures contracts upon their expiry, you’ll have to settle or the value agreed, which could be an extremely costly endeavour, unless you take the appropriate steps to understand and guard against the associated risks with a given trade.

Define Your Strategy

Finally, don’t trade blind. Don’t just lunge in with both feet first into the first position you fancy. Futures trading is a complex business, and it requires a coherent and planned strategy in order to get it right. Some trades will be up, some trades will be down, but without a defined strategy you will quickly lose your way. Developing a strategy takes time, and it’s something you will refine as you trade, but so long as traders appreciate the importance of a clear and definite trading blueprint for consistent trading, they should be able to avoid this common pitfall.