A Basic Guide on How to Trade Futures
There was a time, not too long ago, when the only way to learn how to trade futures was by throwing yourself into a trading pit and just doing it. But traders today have a much better chance of success right out of the box. Why? Because the power of the internet means that longtime traders have the platforms to share their experiences and help beginners learn to trade futures - and win. Armed with a solid futures market education, even the newest of newbies can quickly start buying and selling alongside the top futures traders.
In this article, we’ll walk through the basics of futures contracts and why futures are an excellent option for profitable trading. We’ll also cover the various futures markets, the art of choosing a trading platform and strategy, the benefits of investing in futures, and the mistakes to avoid for profitable futures trading.
Futures Market Education 101 - About Futures
At the most basic level, a futures contract is a simple agreement to trade an asset at a defined point in the future, for an agreed price. In the first instance, futures emerged as a means of hedging against price fluctuations in the commodities markets. The first futures contracts were based on the agricultural markets, enabling farmers and their buyers to fix prices for harvests before the growing season started and protect against later market fluctuations.
Although commodities markets are still used by traders wanting to hedge on price, modern futures markets rely heavily on speculators. Speculators don’t want to take custody of the underlying asset; instead, they trade on price fluctuations.
The presence of speculators created the futures markets as they exist today, in which futures contracts cover all kinds of assets beyond commodities. Futures are traded against stocks, indices, foreign currencies, and most recently, cryptocurrencies.
Futures trading use margin and leverage to enhance the opportunity for profits. By borrowing funds from a broker or an exchange, you can magnify the potential for profits, although it also increases the risk exposure if the markets go against your trade.
Available leverage can vary widely between markets. For example, in the stock markets, leverage is limited to 2x, while in forex markets, it can be significantly higher. In cryptocurrency futures markets, you can trade with up to 100x leverage.
If you can learn how to trade futures successfully, they offer fantastic opportunities to make big money compared to other financial products or derivatives. For example, when trading options, there is better loss protection because you pay an up-front premium on an option. However, while options may offer less risk, futures offer a far greater potential for profitability.
So now that we know all the basics of futures, how do you decide which futures to trade?
Markets Overview - Which Are the Best Futures to Trade?
Obviously, deciding on the best futures to trade will depend on the trader. Choosing which markets you want to enter will mean you need to determine your risk appetite and your available resources for trading. You’ll also need to think about how much time you have for trading each day, which includes time spent on market analysis and evaluation of your results.
For the beginner individual investor, cryptocurrencies provide some of the best futures trading opportunities. A single BTC or ETH can be split down into tiny increments, so there are very low barriers to entry.
Digitex will be the world’s first commission-free futures trading platform, making it viable to adopt a strategy of scalping profits from multiple lower-value trades. Furthermore, crypto exchanges don’t rely on profit-siphoning brokers, although most of them with the sole exception of Digitex do charge fees.
The cryptocurrency markets are volatile, which is bad news for long-term investors. But it’s fantastic news for short-term traders in futures contracts, who can use leverage to magnify gains from the volatility.
Among the rest, forex futures also offer some comparable benefits to cryptocurrency futures, in that you can trade with high leverage and some currencies are volatile enough to provide significant gains. Stocks and indices tend to be far less volatile and offer lower leverage.
Which is the Best Futures Trading Platform?
Once you’ve decided which type of markets you want to trade, then the next step is deciding where to trade futures. Many finance websites regularly provide detailed futures trading systems review for all the major platforms.
However, here are the major points to consider when choosing a futures trading system:
Availability of product
There’s no point in choosing a platform only to find out it doesn’t sell what you want to buy.
Fees and commissions
These will directly eat into your profits. So, the lower the fees, the better your chances of turning a profit.
Especially for a beginner, it should be relatively intuitive and easy to use. More advanced traders may appreciate access to more charts and technical analysis tools.
If something goes wrong, or if you get locked out of your trading account, shoddy customer service is the difference between a good trading day and a terrible trading day.
If the platform gets hacked, your funds may be at risk. Particularly in the cryptocurrency space, high-profile exchange hacks are all too common. Make sure your chosen exchange places the highest emphasis on fund security.
More often than not, choosing a trading platform means making a trade-off on one or more of these points. At Digitex, we are taking pride in building an exchange that excels on every single one of these criteria.
When Digitex launches, it will be the only free futures trading system where you don’t pay a per-trade commission. That alone puts it in pole position for becoming the best futures trading platform.
But there’s lots more. Users will have access to our intuitive, one-click ladder trading interface. And we’re currently in the process of setting up a world-class back office to ensure that traders can focus on one thing - trading.
How to Trade Futures Successfully - Mistakes to Avoid
We will soon publish a post on trading strategies and choosing the best futures trading system that goes into far more detail about specific approaches. So, until then, here are some general tips on how to day trade futures online.
Failing to Manage Your Emotions
Trading psychology is a topic all by itself. But it’s a fact that if you don’t manage your emotions effectively, you run the risk that they’ll eventually get the better of you.
It’s natural to feel fear if you hear bad news about the markets or think it’s worth hanging onto a position to wring a few more dollars out of it. But basing trading decisions on these feelings is a sure-fire route to losing money.
To successfully day trade futures online, stick to your plan, and leave the emotions out of it. As you learn to trade futures will get easier with experience.
Deviating from Your Plan
So you’ve created a plan, tested and tested again and now you’re on the live markets. A few losing trades in, and it’s inevitable that you’ll start to question your plan.
While it makes sense in some situations to revisit a plan, especially if new information comes in, don’t feel you need to deviate from a tried and tested plan just because the market has a wobble. If you’re confident that you’ve done your research and testing correctly, hold your nerve and stick to the plan.
Not Protecting Yourself
If you’re trading longer-term then you should always have a stop-loss in place for every trade. Unless you’re superhuman, it’s impossible to monitor the markets at all times. Especially in the world of cryptocurrency, where trading goes on 24/7, often at a breakneck speed.
A stop-loss will mean that even if the markets perform unexpectedly, you won’t be stuck in a losing position while you’re asleep. But conversely, there’s also danger in taking your eye off the markets.
Taking Your Eye off the Markets
Although you can’t possibly watch the markets 24/7, top futures traders always keep an eye on the big picture and stay abreast of the news. Make sure you hone your analytical skills, learn to read charts and use technical tools, and if you incorporate all of this into your trading plan, you’ll start to see more good days than bad ones.
So hopefully, by now, you’ll feel you know enough of the basics to start planning your entry to the futures market! Being a full-time trader is demanding and it's not always easy to develop futures trading strategies that work, but it’s incredibly rewarding.
Only DGTX holders will be able to trade on the Digitex Futures exchange, as all trades will be denominated in DGTX tokens. You can buy tokens from one of our exchange partners, or via the Digitex Treasury. Buying from the Treasury is trustless and instant, meaning there’s no price slippage.