Is Futures Trading for Everyone?

It could be for anyone who has the history of buying and selling trading instruments such as stocks, bonds, real estate, and collectibles. The difference is a speculator can make a quick profit in trading futures when compared to the other trading instruments, simply because the duration involved could be made short. It is up to the trader to decide for how long to hold the deal. When comparing futures trading with the other trading instruments, it is possible to say that since the price of the other instruments dose not have a wide ranging swing in a short period of time, making a huge profit from selling such instruments is not always possible.

However, when dealing with futures trading the risk is high as there is not a set of rules to follow or mechanisms to use to tell exactly which direction the price of the selected commodities would go. Futures trading resembles gambling more instead of speculating. The reason why it is so is it is difficult to predict accurately what direction the price would go. Because of that, futures trading is among the very risky undertakings. Nevertheless, experts say it is not so and it is those who are speculating that could make the trading very risky or less risky. One key advice is futures trading is not a get-rich-quickly scheme even if those who beat the odds could become rich overnight, which means it should be done systematically, where the amount involved to buy or sell futures will have to be taken into consideration. The statistics is grim when it comes to revealing the kind of loss suffered by speculators in futures trading where up to 95% of the participants could be losers if they are impulsive traders.

To touch on the advantages of futures trading, when compared for example with stock trading, a speculator with $10,000 could buy one contract from one of the stock exchanges and if the total index price of the particular stock exchange goes up making $20,000 profit is not unheard of, which is 200% profit. However, if the same speculator wants to make the same amount by investing in stocks it is only possible to do so by buying individual stocks, which would require a substantial sum, as much as 35 times more, and the vivid difference is it does not require a big sum to make a quick and considerable profit in the futures market. With the same token suffering a loss could also come swiftly and the $20,000 profit could be reversed to a loss if the price goes to the opposite direction that is if it goes down for long and goes up for short.

On top of the quick profits with a short period of time if the speculator has an account with a given margin the amount is liquid and is available unlike the other investment instruments like real estate and collectibles. Even money invested in stocks cannot be liquid with the desired amount, even if liquidating it any time is possible. The commission is also considerably low on future trading when compared, for example, to buying individual stocks where each transaction is subject to commission. There is also a tax advantage in futures trading, because the capital gains is always taxed at a lower rate than other kind of incomes.

Another worth mentioning advantage is a speculator can have a mixed basket where some of the investment could be buy, while the others could be sell and it is possible to cushion the risk by selecting from among the 40 available commodities, which will be easier to follow when compared to the thousands of stocks and mutual funds. This means, for a determined futures speculator it is possible to hedge for the known risk factors that would introduce the ups and downs in prices such as inflation or deflation, boom or depression, droughts, hurricanes, freezes, famine, the rising and falling of interest rates, takeovers, and the like.

What this demonstrates is even if it is not possible to predict which way the price will go, it is possible to diversify the loss and doing that could involves a lot of work, one of the reasons why many speculators would like to depend on the experience and expertise of a broker. The rest depends on the psychological preparedness of the speculator where if there is a discipline that dictates to speculate conservatively if not anything less, cushioning unnecessary losses is possible. This means futures trading has both sides of the coin where it is possible to make a lot of money by speculating, but the end result would be rewarding when doing it conservatively

When it comes to the actual trading it is possible to trade using charts and tables that are available on some newspapers like the Wall Street Journal, and lately they are available online if anyone opens an active account with the number of brokerage houses that are providing their service online. Registering with them for their demo program will also avail access to these charts and tables. The charts are said to be the best tool to use as it is easy to follow the price trend on a chart than on tables laden with figures and the interactive charts could display the price trends the ups, downs, and sideways for any duration desired, better than the old method that used to be done with paper and pencil.

The two methods that will make speculating and trading measurable are the fundamental and technical analysis. The former relies on economic data that deals with supply and demand to predict which direction the price will go while the latter relies on past price action to do the same. In spite of the shortcomings of both methods, most speculators choose to use the technical analysis because if not accurate, past performance and price reaction to various events such as demand and supply, crop size, political, psychological, and economical influences could be inferred better and could lead to a better forcasting of trends in all aspects of the trading.

There is a contention among what the practical traders call the ivory towers theorists who are saying that the financial market is random and highly efficient. However, renowned billionaire traders like George Soros had disputed it and had called the random walk theory manifestly false. What this means is what applies to financial trading is what is know as chaos theory, where mathematicians had managed to analyze what is called the non-linear dynamic system. What it suggests is the futures market is neither random nor efficient. This leads to the conclusion that there is no pattern or trend to rely up on to arrive at a predictable outcome. Instead, the market is an odds game that requires to keep the odds in favor of the speculator.

The conclusion is if traders want to realize profit, there are three known hurdles they have to pass. The first one is to find a trading method that applies a statistical edge, the second one is to apply it consistently, and the third one is the method will have to be applied long enough to show result on the bottom line. Hence, speculators' main role in futures trading is keeping the market liquid while at the same taking profit in cash, without receiving the actual commodity. The other traders who could exchange the real commodities when the deal closes are buying and selling futures to hedge incurring a future loss in whatever they are doing. Consequently, all that is required of speculators is to apply some of the already tested methods that had shown results, by refraining from aiming to get rich quickly.