Reasons Why Trading Futures is Considered Risky
Future Contracts happen to be the most risky category of investments to get into. Therefore they are far from advisable for new traders or even those who are still learning the ropes and don’t yet understand trading inside out & in-depth. They happen to be very tempting option because the kind and mount of profit a trader can make if his predictions turn correct about price and market movements can turn around their life.
On the other hand when trader’s prediction does not match the market reality the trader suffers a heavy financial loss, sometimes to bad that it wipes his entire capital in one stroke. The new traders therefore are generally asked to keep away from it until the time that they have understood the completely underlying basics, feel enough in control, and are familiar with various dynamics that work in the futures trading.
Future trading, in spite of the risks associated with it remains the most popular day trading market. It offers an array of instruments that can be traded plus the trading cost, i.e. the commission is pretty low; and unlike stock trading future trading is free of so many restrictions. As far as futures markets exchanges are concerned trading happens on DTB (Deutsche Boerse) exchange in Europe, and the CME Group in the US. Index futures included in Futures are DAX, CAC40, YM, EX and so on. Popular Currency futures markets include, EUR, GBP, SCH, AUD. And commodities future market includes ZG and ZI representing 100 troy ounce Gold future of Globex & the 5000 ounce Silver future of Globex CME Group both belonging to the US.
Future contracts are executed in futures market. They come with specifications about the underlying commodity, stock or currency which will be either bought or sold as per pre-decided price at a pre-decided date, also called expiration date. Future traders never own the underlying commodity; on the contrary they make their buck on the difference between the buying price and the selling price. Even though future traders do not own stock or commodity still they keep a tab on expiration date so that they can cover all the open positions ahead of expiration.
Types of Future Contract Trades
Future contracts are not only traded by long term traders and day traders, they are also traded by non traders who are looking at benefiting from underlying commodity. Another feature of futures contract is that both buyer as well as the seller are obliged to fulfil the commitment they made before expiration of contract. Day traders do not worry so much about such obligations as they close the futures contract by the due date.
Future contracts enjoy some advantages and benefits over other types of market and trading. Just like wide range of instruments, and volume of trading, futures’ range of price movement and liquidity also happens to be wide. There are some futures market which remain active round the clock.
Advantage: Futures Contract Work in Rising as well as Falling Markets
Future contracts can be traded both ways – long and short. This can be comprehended as follows: if the trader is expecting the market to show a rise they will opt for long trade; this means that future traders will execute their trade by buying a contract, and close or exit it by selling it. On the other hand if the trader is expecting market to take a hit, he will make a short move. This means that the futures trader will execute or start his trade by selling the contract, and will quit or exit the trade with buying of the contract. Likewise a trader based on his capacity, experience, knowledge and willingness can enter into multiple future contracts and for each contract there will be a distinct entry and exit price. The only condition with such multiple futures contract is that number of contracts entered and exited must be same so that the all trades can be exited and completed at once.
The main advantage of futures contracts is that it allows freedom to traders to trade in both directions; in both markets; rising as well as falling. Traders chances of making profits do increase if they learn to identify trends and distances each trend covers. For them more than the direction, what’s important is for how long will the trend continue; the prediction regarding span of time that trend lasts plays a more important role in making profitable decisions.
Handbook for New Investors– Are You All Set & Ready to Start Trading?
I suggest that you first read both parts of this article and then answer to the question!
Part I – Suggested Read – For Better Understanding
“You are all set, and excited about this new investment opportunity called trading -you’ve decided to try; you are absolutely thrilled as you are about to start trading and investing in stocks!” If this describes your present situation (more or less) please excuse me for saying it, but do think twice! Are you really set and ready? If you are contemplating investing your hard earned money in the stock market merely on the excitement logic, let me not hesitate in telling you that it is bound to prove to be bad start.
May be your have another reason – a more convincing one at that – you know friends and family members first hand who have made their millions in stock market within no time. 2 years back they were struggling for funds, today they are so much better off financially. Even if the second reason sounds better than the first, believe me, earning huge returns with no or little trading experience, within small span of time may be nothing more than a fluke. Most buyers of such exceptional stories generally happen to be beginners with no experience and huge unrealistic aspirations.
If you really want to earn money trading stocks, commodities, currency or whatever, the first rule is – don’t fall prey to such stories. I am not saying this to discourage you; on the contrary I’d be happy (and happy to help) if you to get into stock trading or any other type of trading better prepared than that. Instead of being excited, you’d rather be serious; be prepared; and most important of all – be realistic.
Part –II – Must Read – For Better Decision Making
See, if you have a loan against your name or debt showing against your credit card on whatever pretext, for which you are paying 15% to 20% interest every month, I am sure you will agree that it makes better business sense to wipe out that debt first completely, and then start saving afresh for investing in stock market. Why should you invest in stock market which you know is so uncertain; when you know that by clearing off this credit card bill or any other loan reflecting against your name you can straight away save the money you are paying towards interest every month? So, better thing to do is to wipe off credit card bill if any or any other amount showing as payable or due on your name before considering trading.
Another thing you should ensure before getting into trading full time or part time is that you build enough funds in your bank which can keep your life going for 4-6 months without any earnings. Even if your investments earn you nothing by way of returns for first few months or if you happen to lose your job- you should still have sufficient reserve funds to take care of your day to day living expenses during such critical times. If you don’t have reserve funds – then the top priority is to build one.
Another thing you should consider before setting up trading account with a broker is to invest in 401 (k) plan of the employer or company you work with. 401 (k) plan happens to be the best opportunity to build retirement corpus. It does not only give you tax benefits but according to rule your employer or company will contribute equal amount of money that you contribute towards the retirement benefit fund.
Once you have your answers in place for the above mentioned three financial aspects – you are truly ready to start investing.