Futures For You
INSIDE THE FUTURES WORLD
Want to learn how the futures markets really work? Dan O'Neil, a principal at online futures and forex broker Xpresstrade (www.xpresstrade.com), responds to your questions about today's futures markets.
To submit a question, post your question to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.
Rookie mistakes: This month, we'll look at a pair of common questions that many new traders come across when they first wade into the commodity markets.
HOW MANY MARKETS AT ONCE?
I'm ready to start trading futures, and while I'm interested in a number of different markets, I'm not sure how many it makes sense to get into right away. Is there any kind of "magic number" of how many markets a trader can reasonably follow?
The number of markets we should follow is certainly not set in stone, as individual traders tend to have different comfort and commitment levels. Some speculators spread their accounts across dozens of products, preferring a more diversified commodity portfolio. Other traders like to specialize in only one commodity, allowing them to focus on all of the technical studies and fundamental news surrounding just that particular market to get a feel for exactly how it behaves. In truth, however, the closest thing to an ideal situation probably lies somewhere between these two extremes.
On the one hand, you don't want to spread yourself too thin by trying to follow and trade too many markets. Most people simply don't have the time or energy to keep up with the necessary hard work that should go along with following multiple markets -- studying charts, reading market commentary, staying on top of the news, and trying to consolidate all of the information into a sensible trading strategy. Investors who try to follow and trade too many markets often can't give the time and attention they all require.
Still, though you don't want to try to follow too many markets, the opposite is equally true -- trading just one market is probably not a wise approach, either. Just as diversification in the stock market has well-known benefits, there might very well be advantages to diversifying your futures trading, too. If you trade only one market and your position turns against you, your run in the markets could be a painfully short one. However, by participating in multiple markets, losses in some areas can hopefully be offset by gains elsewhere. After all, it's probably best not to put all your eggs in one basket.
As a beginner, you're generally best served by selecting no more than three or four markets to track and trade. When you have become more comfortable with the rhythms of the markets and the amount of work and research required for success, you can add additional commodities as your trading plan allows. That said, however, six or eight markets are really about the maximum that most traders can reasonably follow.
What's a good trade size to start? Do I need to trade big to see any worthwhile gains?
As a new trader, slow and steady is the best way for you to get started -- trying to trade five or 10 lots right out of the gate is a quick route to the exits. Many beginners, keyed up on the potential excitement of these markets, come out blazing, using all the money in their accounts to purchase or sell as many futures contracts as possible. But veterans will tell you that occasional drawdowns in the futures markets are inevitable, and one or two bad trades can wipe out the overanxious trader before he or she really gets started.
A better idea might be to start out with one or two lots and develop a disciplined trading methodology, free from the added pressure that comes with larger positions. Don't be so concerned with profits and losses at the outset; instead, hone your style and decision-making to get a better idea of the types of things you need to do to stay in the game for a long time. Once you've had an opportunity to tweak your trading as necessary, and once you've found a style and a strategy that work well for you, then consider increasing your order sizes.
Another great way to start small is to trade mini futures products which, true to their name, are simply smaller versions of the standard futures contracts. One of the most popular products offered by the Chicago Mercantile Exchange is the emini Standard & Poor's 500 futures contract, which is identical to its flagship S&P 500 futures contract, but at a fifth of the size. You'll also find mini products in grains, energies, and metals, all of which can help you build confidence as a trader without the threat of a devastating loss accompanying every price swing.
Originally published in the July 2007 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.
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