Calculating Rate of Return

Now that you have your approach to trading and the basic essential groundwork laid down, it’s time to get on with your trading – but not before you come to terms with how returns are calculated when dealing in futures. This is an essential skill to master, because it allows you to determine at a glance whether your trade has the ability to become profitable.

Calculating return is a simple process – you’re simply looking for the potential closing price of the asset if it moves in a certain, precedented fashion (on the strength of your technical analysis), while factoring in the costs of trading including the purchase price, financing costs and any broker commissions paid. This can be used to calculate both the potential return and risk of a transaction, substituting potential price for a zero value in order to calculate maximum losses (factoring in that futures contracts are obliged to be settled on maturity, even if you can’t find a seller and your contracts lose all of their value). By having a strong grasp on these figures and calculations, you will be in a stronger position to trade futures successfully and profitably – knowledge is power, and you owe it to your future trading career to have a firm handle on this most basic and fundamental of investment intelligence.

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