5 Steps In Trading Futures

Step 1: Setup

If you speculate that the price of the underlying asset will go up, then you’d go long on its futures contracts in an outright speculation or if you speculate that the price of the underlying asset will go down, you’d go short instead. Determine how long you expect to be in the trade so that you know which month contracts to trade.

 Basically, if you’re planning an aggressive short term trade, you’d choose near term futures contracts and if you’re planning for a less volatile and maybe long run futures trade, you’d choose futures contracts with longer expiration.

 Step 2: Risk Tolerance and Position Sizing

In Futures trading, as a highly leveraged trading method, losses can build up very fast and wipe out an account faster . In Futures trading   profits and losses are settled at the end of each single trading day as part of  “Daily Settlement”.

you would like to find out  what proportion of your fund you’re willing to risk for a trade position. This is often determined by the total% of cash in hand. Most futures day traders have a 1-2% risk tolerance. You need to make a decision what proportion of cash  you’re willing to lose.   Once you recognize exactly what proportion you’re willing to lose, you’ll now determine what percentage futures contracts to trade.

 Position sizing is nothing but way of determining how many  futures contracts to trade. Always make sure that when the price  of the underlying asset moves against you the amount of total loss on the futures position is within your risk tolerance.

 Step 3: Initial Margin Requirement

Once you determine the amount of futures contracts to trade, you now need to determine which future contact to trade and  the total amount of initial margin needed .

Initial margin is required regardless of if you’re taking the long side or the short side when trading futures.

 Step 4: Entry and Stop Loss – Risk management

Once you’ve got determined which direction to trade, which derivative instrument to trade, what percentage contracts to trade, what proportion cash to pay so as to trade that a lot of futures contracts, it’s time for you to form your trade entry. When trading futures, ensure you go long when speculating that the underlying asset price is going up and go short when speculating that the underlying asset price is going down. Once your futures position is placed , you would like to also set your stop loss order to avoid any huge loss due to volatility in the market.

 There are many futures orders you can use when making your entry and stop loss order so ensure you know what sort of orders your futures broker offers and plan your trade entry accordingly.

 Step 5: Offset (Close the position)

 In futures trading, you close out a futures position by “offsetting” the futures position. To Offset a futures position is to shut out the futures position by taking an opposite and equal transaction within the futures exchange market  to neutralize the futures position that you simply owned. Neutralizing a futures position brings net position to zero and can not be obligated for delivery.