You have just opened a trading account, and you’re looking for some tips on how to trade futures. You’ve probably already heard that futures traders are a special breed of investors because they take on a lot of risks to earn a significant return.
But what does this mean? Which risks can you expect from trading futures, and which returns should you expect from your investment activities in the long term? In this article, we’ll take a look at eight practical trading tips for novices who want to start trading the futures market today.
Invest money that you won’t need in the next 5 years
Don’t create a situation where you must make money in the short term because this will likely cause you to take on unnecessary risks. By definition, futures are speculative tools that offer a leverage of 1:2 or higher. This means your investment can double or even triple in value overnight if prices move favourably enough.
Never average losers
The most popular mistake that novice traders commit is averaging down their losing positions with hopes of recouping their losses. It’s a high-risk strategy that can easily lead to even more significant losses in the future. Futures markets are incredibly volatile, and trends can reverse quickly, so there’s no guarantee that your average position will eventually break even, let alone turn a profit.
Use stops and limits
One way to help mitigate risk when trading futures is to use stop orders and limit orders. You instruct your broker to buy or sell a security once it reaches a specific price point, thereby limiting your losses on a bad trade. A limit order is similar but sets the maximum price you’re willing to pay for a security or the minimum price you’re ready to sell it for.
Don’t assume rising markets are good markets
Futures traders love rising markets, but rising prices don’t necessarily make it easier to make money. If anything, growing markets create more opportunities to lose money if you’re not careful. When trend lines indicate that prices are likely to keep rising, this is trending. However, quite often, price trends will reverse and start falling instead. This creates downtrends which typically offer just as many trading opportunities.
Separate trading from investing
Remember, your trading account is not the same as your investment account. The money you use to trade futures should be considered “spent” and not part of your long-term investment strategy. If you ever land in a situation where you can’t afford to lose the money you’ve invested, then it’s time to get out of the market.
Start small
One of the worst things you can do as a novice trader is investing too much money into your first few trades. It increases your risk, making it harder to stay in the market if things start going south. Instead, start small and gradually increase your investment to gain more experience.
Use a demo account
A demo account is a great way to practice trading without risking real money. Most online brokers offer these accounts, allowing you to trade using virtual currency in a simulated environment.
Use charts and technical analysis
One of the best ways to understand the markets is using charts and technical analysis. This involves studying past price movements and looking for patterns that can help predict future prices. While this type of analysis is not always accurate, it can be a valuable tool for novice traders who are still trying to understand how the markets work. Contact a reputable online broker from Saxo Bank on how these tools work if you need an explanation.
Final Word
Like everything else in life, success in futures trading takes time and patience. Don’t expect to make money overnight. It’s much more likely that you’ll lose money in the short term. Instead, focus on honing your trading skills and building a long-term strategy that can help you succeed in futures trading and beyond.
