There are many ways to trade futures; Futures can be traded for hedging, spreads, outright speculation and arbitrage.
These are merely the most essential and fundamental decisions and steps to take when trading futures. Find Out How My Students Make Over 45% Per Trade, Confidently, Trading Options In The US Market Even In A Recession!
No matter what kind of underlying asset you are trading futures on, you need to first have an outlook. Position sizing is a way of determining how many futures contracts to trade in order to make sure when the price of the underlying asset move against your favor in the amount you expect, the total loss on the overall futures position is within your risk tolerance. Once you have determined the number of futures contracts to trade, you now need to determine which futures contract to trade and the amount of initial margin needed to trade that many futures contracts.
Initial margin is needed no matter if you are taking the long side or the short side when trading futures. Once you have determined which direction to trade, which futures contract to trade, how many contracts to trade, how much cash to pay in order to trade that many futures contracts, it is time for you to make your entry. There are many futures orders you can use when making your entry and stop loss order so make sure you know what kind of orders your futures broker offers and plan your entry accordingly.
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No matter if you are taking profit or stopping loss when trading futures, you would need to perform an action known as "Offset".
Data and information is provided for informational purposes only, and is not intended for trading purposes. Spot trading of the underlying asset itself is a simple matter of just buying at one price and selling at a better price. These steps in trading futures assume that you have a good understand of the basics of futures trading especially in terms of the margin trading system used in futures trading.
If you expect the price of the underlying asset to go up, you would go long on its futures contracts in an outright speculation or if you expect the price of the underlying asset to go down, you would go short instead. Futures trading, as a leveraged trading method, losses can build up very quickly and wipe out an account faster than most beginners to futures trading can imagine.
Basically, if you are planning an aggressive short term trade, you would choose near term futures contracts and if you are planning for a less volatile and perhaps longer term futures trade, you would choose futures contracts with longer expiration. If you don't have enough cash to trade that many futures contracts, you would have to cut back on the number of contracts to be traded. When trading futures, make sure you go long when speculating on the underlying asset going upwards and go short when speculating on the underlying asset going downwards. However, the margin trading system used in futures trading is completely different and requires a lot more than just buying at one price and selling at a better price. Please also take note that the steps outlined in this tutorial deals with outright speculation in futures without intention of taking delivery on physically delivered futures contracts.
You also need to determine how long you expect your trade to run when trading futures so that you can decide which month contracts to trade. Futures trading is definitely one trading method that is intolerant of losses as profits and losses are settled at the end of every single trading day in a process known as "Daily Settlement".
This step of choosing which futures contract to trade should actually be completed in the position sizing stage.
This shouldn't be the case if you are following a sensible futures trading plan that doesn't require you to trade with all of you money. Once your futures position is put on, you need to also set your stop loss order as planned in the earlier steps.
The actual process is invisible to the futures trader and undertaken automatically by your futures broker. Trading with all your money means that you would not have cash remaining to meet maintenance margin requirements should the trade move against your favor badly.
Once you know exactly how much you are willing to lose, you can now determine how many futures contracts to trade.
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