There are many reasons why traders choose futures when trading the markets. The great leverage offered, easy access to many markets, and high liquidity, are some of the reasons that make futures trading so attractive. However, does going with futures make you more likely to become rich, than if you had gone with stocks or other more common securities?
Futures trading indeed can make you rich. However, while it by no means suggests that all futures traders are profitable and make money, futures on their own are versatile and great securities that can be of immense help to many traders. Still, you cannot escape the fact that the outcome of your trading relies on the trading strategy, regardless of the security you trade.
So how come that futures contracts could be one of the better options when it comes to getting rich and/or making money in trading? Well, we have already touched on some of the reasons in the introduction, but let’s now have a look at some of the advantages one by one!
Futures come with leverage inbuilt, which means that you can control much more of the underlying asset than the amount that’s required to open a trade.
Many futures contracts will require as little as 5% of their underlying value for the initial margin, which is the amount required to open o position. In a case where one futures contract is worth $100, this would mean that you could get into the position with as little as $5 sitting on your account!
Liquidity should never be underestimated. Trading an illiquid market where there is no one to take the other side of the trade, will result in massive amounts of slippage.
Fortunately, futures tend to be very liquid, and in many markets, they may be the only security that’s actually tradable. This is something that will make it easier to become rich, since you have to pay less slippage, and also may extend to new markets that might not be tradable through other securities.
2. Short Selling
Going short in futures is as easy as going long. You just have to press the sell button, and you’re done.
This is a big difference from other securities, like stocks, which have had short-selling suspended in times of great falls, to keep markets afloat. Often, short selling is suspended right when you’re the most inclined to make use of it, which of course could pose a serious hinder.
Fortunately, futures have no such limitations!
3. Low Costs
Compared to other securities, futures are very cheap for the market exposure you get. Trading one contract could cost as little as $0.25 per side, and coupled with very little slippage, you can be sure to keep more of the profits for yourself. This, of course will make it easier to become rich in the long run.
Are there any disadvantages
There sure are some, but in our opinion they are minor things when seen in the light of the advantages.
Here are they are:
Futures Expire: As a futures trader you must know when the contract expires, so that you can rollover to a new contract with a later expiry date. How this is done is something we cover in our article on how to roll over a futures contract.
Don’t suit long term investing: The effect of contango and backwardation, which in short refer to that the price of a contract will change depending on the remaining time until expiration, could have very serious effects on your returns in the long run.
Beware of Leverage: This perhaps doesn’t count as a disadvantage, but it’s always important to keep in mind that leverage works as a double-edged sword, and will magnify both losses and profits. In the hands of an inexperienced trader, this could have catastrophic consequences!
How to Become Rich and Make Money Trading Futures
With this covered, we understand that you might be interested in learning how to trade futures in a correct manner that maximizes your chances of becoming rich one day.
Let’s look at the various steps!
1. Understand futures, expiry dates and rollover
Before you even may consider trading futures, you must make sure to become familiar with the main aspects of futures trading.
Some vocabulary you should know is:
Initial Margin: This simply is the amount of money you need to have in your account to be able to open a position. As we briefly discussed earlier, this tends to be around 5-15% of the total value of the contract.
Maintenance margin: This is the amount of money you need to have to keep a position open. The maintenance margin will always be lower than the initial margin, so that you have some room for price swings after entering the position.
Margin call: If a trade goes against you, and you don’t longer have the amount of money specified by the maintenance margin requirement, you’ll get a so-called “margin call”. This simply means that the broker will get you out of the trade, and will charge a fee to do so.
Last Trading Day: This is the day on which trading ceases in the current contract, and requires you to roll over your position to the next contract. Again, our guide to how to roll over a futures contract goes deeper into how to rollover your positions.
2. Develop a trading strategy
As you probably understand, trading futures is no different from trading other securities when it comes to the methods and strategies you have to employ. Futures simply give you easy and cheap access to many markets, and in effect, it’s those markets you’re trading.
The one and most important aspect of trading, is the trading strategy you employ. You have to make sure to have a strategy that’s based on some market behavior that has been consistently profitable in the past, and is likely to be so also going forward.
This process of finding a trading strategy consists of the following steps:
1. Testing trading ideas on historical data, using backtesting: This is how you make sure to only trade those rare patterns or strategies that actually have worked in the past. You would be surprised to see how many traders are trading strategies that don’t work at all, and become losing traders as a result.
2. Refining what works: Once you’ve found something that holds promise, you go on and continue to add more conditions or filters, to enhance the performance. Once you’re done, you have your strategy ready. However, you’re not ready just yet!
2. Validating the strategy: Just spotting something that seems to work isn’t enough to transition to live trading. There is always a chance that the strategy you validated worked out of random chance. This is often referred to as curve fitting.
Of course, the process of building a trading strategy involves a lot of things that would be beyond the scope of this article, both in length and relevancy. Therefore we recommend that you look closer at our guide to building a trading strategy, where the points above plus much more will be explained in detail!
3. Controlling Risk
The most valuable thing you have as a trader, is your capital. Together with your strategy, this is the main tool that you must use to make money. As such, it would be disastrous if you lost all, or most of your money because you didn’t know how to manage your risk.
As a general rule of thumb, it’s recommended to not risk more than a few percent of the total account balance on one trade. It’s also advised that you make use of a stop loss, to add further protection against trades that don’t go your way. While they’re by no means idiot-proof, they provide extra protection that will prove extremely valuable going forward!
By not risking too much on one trade, you can afford to have several trades going against you, without getting into drawdowns that are irrecuperable by their sheer size!
4. Controlling Yourself
Even if you manage to have both great risk control and a properly tested and working trading strategy, at the end of the day, it’s you who are going to pull the trigger and place those trades. And even if this might not seem like an issue whatsoever at first glance, many people struggle especially with this part!
The most helpful advice we can give, is that you should start keeping a trading journal. As we cover in our guide to trading journals, keeping a record of your trading performance, how you reacted emotionally in different scenarios, and what decisions you made, will prove invaluable later on, as you revisit your entries. Many times you’ll note recurrent tendencies and behavior that went unnoticed in the heat of the moment, and that could be holding you back!
Best Way To Learn Trading
Many traders try to learn trading themselves. This is doable, but you will be wasting a lot of time on concepts and methods that don’t work at all. To be honest, most of what is available to read and watch online about trading is outright garbage.
We recommend that you take a trading course from a trusted trading website or educator, to accelerate your learning curve. Even though it might seem like a big investment, you’ll quickly make it back as you drastically reduce the number of mistakes and erroneous decisions you would have made on your own!
You indeed can become rich from futures trading. The great liquidity in most futures markets, the ease of access, great short-selling opportunities, and high leverage, all make futures some of the most flexible and useful securities out there.
Most of our own algorithmic trading is done in the futures markets, which allows us to trade a wide range of markets that wouldn’t be available otherwise, and spread our risks.
Just remember to backtest and validate your strategies before risking any real money. The future of your trading career relies on the strategies you trade, and as such, you want to be really confident that they will continue to work going forward!
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