How To Know If Futures Are Right For You

Anyone looking to trade basically has 3 choices : Stocks (common or options), Futures, or Currencies. Sure there are bonds and a few other more exotic things, but for most people those are not an option. The most well understood is stocks, and least is probably currency pairs. Most people have heard of futures and they are not too hard to understand given a bit of research and reading.

First off, futures inherently have leverage far beyond stocks. Most stocks you can get 2:1 leverage overnight and 4:1 intra-day for day trading. Futures are leveraged by default because of how they are constructed. This is a double edged sword. For one, you can trade futures and have a reasonable rate of return with as little as a few thousand dollars. Stocks this is not possible (unless you delve into the murky waters of penny stocks). This allows returns to be amplified UP and DOWN. It is not unreasonable to have $5000.00 in your account and on a single trade make or lose $300-$500 depending on which future you trade – a 10% return (or loss!) on your principal in the account. If this type of risk makes you nervous – then futures are not for you.

Second, futures by nature are actively traded and lead the market pushes and selloff’s. This can create volatility which means lots of trading opportunities. With this action comes the forced nature to think quickly. You often times only have a few seconds to get an order in or you will miss the move. It is also desirable to anticipate a direction and have an order in ahead of time. Again, this requires skill and fast thinking. If this is not your strong suit, or you are very analytical, futures day trading or swing trading is probably not for you.

Lastly, you must be able to assess risk and stop levels quickly, almost second nature. You cannot enter a position and then think about where your stop should be and where your target should go. You should already know this before entering the trade. Since futures are leveraged a lot, you should always assess the stop first (read risk level) and determine the odds of that stop getting hit in the next 10-15 minutes BEFORE actually placing a trade. Why 10-15 minutes?? Most futures trades only last this long on average unless they are swing plays which can last hours to days. Most traders choose not to take futures overnight because of the gap risk and the additional overnight margin required to do so. They close out positions each day.

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