In any futures trading forums, beginners like to ask this question “How do you trade futures?“.
The short answer is to find the best futures broker, open an account, and start buying or selling futures contracts. The long answer is it depends on what you want to trade.
Answer To How Do You Trade Futures
There are many different types of futures contracts, such as bonds, currencies, stock indexes and commodities, and each has their own individual characteristics.
- Soft commodities futures are largely influenced by weather, supply and demand, and have seasonal tendencies.
- Hard commodities such as precious metals have industrial demands but are also regarded as inflation-hedging and a good store of monetary value.
- Stock indexes futures mirrors the combined sentiments of the stock markets’ participants, companies’ news and earnings, which made them difficult for real price valuation.
- Bonds futures are correlated to interest rates announced by the central banks, probability of default and the amount of borrowing. For example, in the Euro Crisis, bonds sold by Greece have a relatively high interest gain, to make them as attractive to the buyers as possible.
- Currency futures are the most speculative, and are influenced by all the previous types of futures.
In addition, prices of related futures products tend to move together:
|All crops||Income for farmers based on per acre yields|
|Grains||Protein value used for feed|
|Livestock and feedgrains||Cost of feed affects the cost of livestock|
|All livestock||Consumer purchases influenced by price|
|Sugar and corn||Commercial sweetener substitution|
|Hogs and pork bellies||Product dependency: bacon prices depend on hog prices|
|Silver, gold and platinum||Investor’s inflation hedge|
|Interest rates and stock markets||Investor continually choose between stocks and interest rates|
|Interest rates and Forex||Investors worldwide move money to seek the best returns|
With the low interest rates environment in 2013-2015, it has given rise to bullish stock market and trending forex markets.
Which Futures Exchange Market Should You Monitor
Unless you are very rich and have a large team of traders behind you, it might not be possible to trade every futures contract available. It is better to trade smart and focus your energies on one or two. Hedge funds have many powerful computers with powerful software to help them analyze the various futures markets.
Use The Commitment Of Traders COT Report
Here, at this site, you can rely on the commitment of traders Cot report heat-map to guide you on choosing the right market to concentrate on. The right market has high trading volume and is volatile due to the large number of participants. Good examples for year 2011 are gold, silver and palladium.
Final Steps To How Do You Trade Futures
The next step is to study the historical price charts. Hopefully, you have a generic futures trading plan. Otherwise, you would have to come up with one, and back test the trading strategy to determine whether it is safe to use or not. Once this is settled, monitor the charts at the same time every day.
This could be at the open of the market, or the close of the market. There can be some flexibility based on your availability. Once the entry setup conditions have been met, place the trade. Do so for a couple of times, and you will find yourself smiling the next time someone in the forum asked “How do you trade futures?”