7) Futures Fundamentals: How to Trade
Futures trading is an advance investing instrument that is not suitable for everyone, especially beginners. If you feel you have enough experience in investing to get into futures trading, know the risks and how much of it you are willing to take. An advanced understanding of the market and contracts is essential before you get into futures trading. Being a futures trader also requires time, attention, and research to be successful in your investments. Talk to your broker first and ask questions before opening a futures account.
For futures traders, it is recommended to stick to funds that are tagged as pure “risk capital.” The next step in becoming a futures trader is the, “How?” There are three general approaches to consider:
Managed Account: This is similar to an equity account. Your broker will trade on your behalf as per conditions agreed upon when the account was opened. As the name implies, a professional will be making the decisions on your behalf, or managing the account for you. This lessens the financial risk. However, any losses incurred will still fall under your responsibility. Manage accounts also require a management fee.
Commodity Pool: This type has the least risk involved. It is like a mutual fund. The account is not owned by a single person. All funds are combined with others and traded as one, and profits and losses are directly proportionate to the amount of money that each invested. This also gives you the advantage of investing in different types of commodities and you are not subject to margin calls. Risks in the futures markets are still present, so it is important that it is managed by a skilled broker.
Do-It-Yourself: The name pretty much explains this approach. You are not being aided or given advice by a broker or professional. Everything is done by you, including managing funds, ordering trades, maintaining margins, doing research, and coming up with your own analysis. This requires you to devote a lot of time and complete attention to the market. This is the most risky of all approaches. Only experts or very experienced investors are recommended to enter into the futures market using this approach.