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Futures Trading Basics: What to Consider Before You Trade

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The “look before you leap” adage does not really cut it when you are considering diving into the complex world of futures trading.

That’s because futures is a multilayered landscape, and analyzing it is a serious endeavor for any investor. In short, it will take time and effort to get it right.

Most people are aware that investing in any market is not risk free. It’s the same with taking a plunge into futures: Investors must weigh the potential windfalls against the potential losses, whether they’re buying contracts on soybeans, gold or interest rates. Futures investors, however, should be particularly attentive because the risks can be higher than other traditional sectors. For instance, you’re typically more highly leveraged in futures than you are when buying equities.

Before investing in futures, you need to know your tolerance for risk, investment goals, and financial resources. Let’s break down these futures trading basics a little further:

Risk Tolerance

Trading futures can be risky, and that’s something all investors must grasp before entering the field. If risk is something you can’t tolerate, and if you’re seeking more predictable returns, you might consider other conservative types of investment.

You must consider what you can stomach losing. Financial experts typically call it your “risk tolerance.” That is, you should know what you can afford to lose if a bet goes south or if a market is unexpectedly buffeted by negative news events.

And remember, while bank deposits are federally insured, there’s typically no such protection for investing in markets, including in futures. It’s possible you could lose your entire principal investing in futures contracts.

Investment Goals

You may well be attracted to futures because it offers a wide variety of investment vehicles — from corn and other hard commodities to currencies, interest rates and other financial products.

It’s crucial to fully comprehend what you are trying to achieve in the field and over what time period. If you’re looking to make a quick buck — i.e., over a brief time horizon — then futures might not be your best option.

Available Resources

Investors need to examine how much time and money they have available to invest in futures. So, it would be wise to come up with a financial roadmap that gives you a complete picture of your net worth and your goals. You could talk to an accountant and other financial professionals as you assess your position, and you may well enjoy the benefits of having full control over your financial assets in the process.

Futures markets are complex, so besides investing money you need to invest time to understand it all. Qualified brokers and modern trading tools, such as automation, help to make the process more efficient for the investor.

Your Decision

As French General Ferdinand Foch once remarked, “No study is possible on the battlefield.” Investors should think likewise: Make sure you have the futures trading basics down before launching a foray into the trading sector.

But once you have taken stock of your position and believe you have done an excellent job of surveying the field, then it’s time to take the next step: selecting a professional broker whom you can trust.

Our team brings a wealth of experience to the table, where investors can partake of a broad array of market expertise that will help ease entry into futures trading. Contact us to learn more about opening a futures trading account with StoneX.

Download the eBook: Futures and Options Strategy Guide