Futures Trading for the Beginner

Those that don’t fully understand the futures market often get the impression that futures trading is “very risky”.  However, this can be true for any leveraged asset class if the trader doesn’t practice a sound low-risk, high probability strategy. For the astute, futures trading can be a great vehicle for generating daily and weekly income because of the leverage offered in most contracts, depending on the market and time of day in which trades are executed (roughly ten to fifty to one).

For example, a trader can control a one hundred troy ounce contract of gold for much less than its notional value (notional value at today’s price of gold is $120,000). The notional value is derived by take taking the price of the contract multiplied by the quantity. In the case of Gold: 100 Troy ounces times $1220 per ounce is how we come up with $120,000 notional value.

A trader can control this contract for a deposit of $4620 if trading in the overnight market, and half of that for intraday trading. The leverage gets even better for the Stock index futures contracts such as the E-mini S&P as the intraday margin is reduced to 25% of the full margin in most brokerage accounts.  This means that a trader can control over $120,000 worth of the index for a mere $1200 deposit in a futures account.

Lessons from the Pros - Futures

Don’t let these numbers frighten you as it’s all about entering at low risk and with high probability. Following this strategy, this type of leverage should not make a trader fearful, but rather, excited about the opportunities. This alongside the fact that the futures markets trade continuously, 24 hours a day five days a week, also makes them an enticing vehicle for the working professional.

As is the case with all asset classes, futures come in variety of contract sizes and volatility levels. So the question for those starting out is, which contracts can I trade that require lower margins and are less volatile?  Keep in mind that volatility can change very quickly so traders needs to adapt.

Since most new futures traders are somewhat familiar with the stock market, a good place to start is in the stock index futures. The NASDAQ, in particular, is a good starting contract. The intraday margin is less than a thousand dollars and it trades at $5.00 per tick, $20 for a whole point.  The liquidity is also very good in this contract as it trades on average of 400,000 contracts per day.

For those interested in currency futures, the British Pound and Canadian dollar are also smaller, less volatile contracts that can be easier to trade for someone starting out. The BP (British pound) pays $6.25 a tick with a margin of $2600. The CD (Canadian Dollar) is even lower in its margin requirements at around $1320; it pays $5.00 per tick.

In the grain markets, the 5000 bushel Corn and Wheat contracts are also viable for the trader just starting out.  These both have margins around the $1000 area and pay $50.00 per point. The trading hours are somewhat unique so make sure you check the CMEGroup website for the trading hours; and also make it a habit to check a commodities calendar at the USDA.gov website at the beginning of every week for upcoming reports that may impact prices.

Lastly, the interest rate market is very important in the financial markets as its price movement can have ramifications throughout the global financial system.  The Ten-Year note contact is one of those contracts that can be traded by the novice. This contract controls a notional value of $1000 times the price of the 10 year US Treasury Note and has a margin that’s roughly $1600 and pays $15.625 per tick.

And there you have it. This is a small group of markets that I recommend for the trader learning a low-risk strategy.  And, as is the case when starting any new endeavor, make sure you practice on a simulator account initially to gain the practical application and confidence in the strategy. I hope this helps and I look forward to seeing you in the classroom or the XLT rooms.

Until next time, I hope everyone has a great week.

Learn to Trade Now

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