- How much money do I need in order to begin trading?
- Are futures options the way to make money in trading?
- How do I find a good, honest, reputable futures broker?
- Is it better to be a technical trader or a fundamental trader?
- Do I need live price data?
- Do I risk delivery of 42,000 pounds of live cattle?
- How can you sell futures if you don't already own them?
- Where are futures traded and where can I get prices?
- What exactly is leverage?
- Is it possible to make really big profits trading futures?
- What is a Futures Contract?
- What are the mechanics of a Futures Trade?
- How do I make a Futures Trade?
- What is Price Risk Management?
- What are Offsetting contracts?
- Who uses Commodity Futures?
- How are Futures Brokers regulated and licensed?
- What are some common sense rules for trading?
Q. How much money do I need in order to begin trading?
A. The simple and honest answer is "the more the better." Anyone who told you that you can make it big with $1,000 is not telling you the complete truth. Ideally, a $20,000 risk capital account is optimal while $ 15,000 is acceptable and $10,000 is minimal. Anything less then $ 10,000 will put you in the lowest success group category.
Q. Are futures options the way to make money in trading?
A. No, not if you're simply a buyer of calls or puts. Most of the people who lose in options are buyers of puts or calls. Most puts and calls expire worthless. It's the sellers of options who make the money. There are enormous financial requirements involved in the selling of futures options.
Q. How do I find a good, honest, reputable futures broker who won't charge me an arm and a leg in commissions?
A. First off, the commission fee is not the most important aspect in determining which futures broker to use. The execution and speed of your fills is far more important. You can find a broker with very low commission fees but bad fills resulting in too much slippage will cost you alot more money in the long run. The best way to find a futures broker is by referral.
Q. Is it better to be a technical trader or a fundamental trader?
A. At Apogee-atl.com we prefer the technical approach. We believe that the fundamentals are too difficult to know in advance and more often than not they are distorted, misinterpreted or exaggerated. The sooner you receive the fundamental information, the better off you are in using that data in your trading. The only problem that you may find is that you are competing with traders that have better access to this information. The prices and charts tell no lies. All traders are equal in the eyes of technical analysis. All the professionals have the edge on you when it comes to trading fundamentals but when using technical analysis you are equal to them if you have developed the skills.
Q. Do I need live price data?
A. If you plan to daytrade or to short term trade very aggressively, you will need the services of a live quote service. Don't spend your money on live data if you are only considering position trading as you can find plenty of web sites that offer free end-of-day price quotes. End-of-day data is more than enough and even that may be unnecessary.
Q. Do I risk delivery of 42,000 pounds of live cattle?
A. That's a market myth. Your futures broker will tell you if you have held a contract to the time of first notice or intended delivery. At that time he will advise you to liquidate or rollover your positions. You will not have to worry about the cattle grazing on your lawn.
Q. How can you sell futures if you don't already own them?
A. One of the greatest advantages of futures contracts is that you can sell them without first owning them. The reason that this is possible is because futures represent an agreement to buy or sell something at some time in the future. Because it represents a deferred transaction, futures can be sold just as easily as they can be bought. There is no difference at all between buying and selling from a trading perspective. Thus, the futures trader who expects prices to fall can sell futures now and hopefully buy them back later at a cheaper price, and make a profit.
Q. Where are futures traded and where can I get prices?
A. Futures are traded only on designated futures exchanges, and in pits allocated specifically to that particular future. You can be anywhere on the planet when you decide to buy or sell futures, but to be executed, your order must get to the pit. That is the job of the broker. You call your broker with your futures order, and they relay it to the pit where it is executed. By law, futures orders cannot be executed outside of the pit.
Q. What exactly is leverage?
A. Leverage is a measure of the market value of your futures position relative to the amount of your total trading capital. The greater the degree of leverage, the more futures value you control relative to your capital. Futures contracts, in themselves, are highly leveraged instruments: a little bit of money controls a lot of futures value. For example, some futures can be bought or sold for as little as two percent of the market value of the futures required as margin. It is leverage that enables tremendous profit or loss to be made relative to your trading capital.
Q. Is it possible to make really big profits trading futures?
A. Yes, it is, but keep this in mind. There is a relationship between risk and return that has shown to hold over time, namely, that higher returns are often associated with higher risk. So while it is possible to make big profits trading futures, the trader is also exposed to considerable risk - risk of losing money. Beginning traders are probably better off "lowering their sights" a little and, consequently, playing it more safe.
Q. What is a Futures Contract?
A. A commodity FUTURES CONTRACT is a firm commitment to deliver or to receive a specific quantity and quality of a commodity during a designated month at a price determined by open auction on a futures exchange. For example, someone buying an April Gold contract at $345 an ounce is obligated to accept delivery of 100 ounces of gold during the month of April at a price of $345 an ounce. Someone selling an April Gold contract would be obligated to deliver the same quantity and quality of gold at $345 an ounce.
Q. What are the mechanics of a Futures Trade?
A. As a buyer or seller of futures contracts, you must make an initial "good faith" deposit (margin). Since contracts may be closed (liquidated) at any time prior to the "settlement" date, every futures position in your account is marked-to-the-market (its value calculated at the close of each (trading day) and profits/losses are credited to/debited against your account. Any profits over the margin requirement may be withdrawn or used for other futures contracts. Futures traders exercise substantial leverage by utilizing a performance bond or MARGIN to control a futures contract. Margin is money deposited by both the buyer and the seller to assure the integrity of the contract. The minimum margins are set by the Exchange and are usually about 10% of the total value of the contract. Details concerning the customer's margin requirements can be obtained from a broker. In this way investors realize full price movements without investing the full amount of capital which each contract represents. A futures margin deposit is not the same as margin on stock purchases. Both margins secure your purchases or sales, but they differ in many ways. Stock market margins are a form of down payment for the purchases of an asset. A futures margin is more of a performance pledge, ensuring that obligations will be honored. Since a futures deposit isn't an extension of credit (like a stock margin is), you may earn interest rather than pay it. Moreover, while a stock margin is typically around 50% of the value of the purchased assets, a futures margin generally ranges from 5-10% of the contract value.
Q. How do I make a futures trade?
A. Futures contracts are traded through Futures Commission Merchants (FCMs) or commodity brokers. These individuals are licensed through the Commodity Futures Trading Commission (CFTC), a regulatory agency of the federal government. When you have satisfied the financial requirements set by the brokerage firm, a futures trading account will be open in your name. Through your broker you are then able to make a commodity futures trade. Commodity brokers will charge a commission for executing your trade. The commission constitutes the only major cost of buying and selling a contract. Managed commodity accounts may also be charged management fees and/or percent of profit fees. At the end of each trading session, all trades are checked and balanced with the Clearing House, which becomes the guarantor of all trades. In effect, the Clearing House becomes the buyer for every seller and the seller for every buyer. Therefore, the Clearing House insures both sides of every futures transaction.
Q. What is the price risk management?
A. Downward or upward shifts in the demand or supply of a commodity can result in PRICE VOLATILITY. Price volatility creates financial risk for users and suppliers of a commodity. Anyone whose business depends on a volatile commodity has a real need to manage price risk in order to insure continued profitability. Standardized contracts for the delivery of a commodity are exchanged or traded in the trading pit. The price of the contracts is determined through competitive bids and offers, a process called OPEN OUTCRY. The purchase of futures contracts offsets the obligations to deliver the actual commodity by later selling a contract for delivery in the same month. The vast majority of futures contract obligations are met by taking such offsetting positions.
Q. What are offsetting contracts?
A. In practice, only a small percentage of futures contracts traded are actually held to delivery. Maturing futures contracts expire on specific dates during the contract month. Your broker can supply you with expiration dates. At any time before the month the contract matures, the trader may close out his obligation through an opposite or offsetting trade. By offsetting the futures contract, the trader cancels any obligation he has to take delivery of the underlying commodity. For example, the buyer of an April Gold contract can sell that contract before April. The difference between the price when the trade was initiated and the price when it was offset is the gain or loss on the trade.
Q. Who uses Commodity Futures?
A. There are two reasons to use commodity futures contracts: 1. To hedge a price risk, and 2. To speculate in the changing price. A HEDGER is someone who owns or plans to purchase an inventory of a commodity and wishes to reduce risk associated with this ownership. All Hedgers make their purchases/sales solely for the purpose of establishing a known price level in advance for something they later intend to buy or sell in the cash market. They do this by taking an equal and opposite position in the futures market than they have in the cash market. As the price of the commodity fluctuates, the hedger is protected because gains in one market are offset by losses in the other market, regardless of which direction the price moves. Hedgers willingly give up the opportunity to benefit from a favorable price changes in order to achieve protection against unfavorable price changes. SPECULATORS, on the other hand, are willing to accept the risk the hedger wishes to relinquish. Speculators take positions on their expectations of future price movement often with no intention of making or taking delivery of the commodity. They buy when they anticipate rising prices and sell when they anticipate declining prices. The speculator provides a very important function in the futures market because without him, the market would not be liquid and the price protection sought by the hedger would be very costly.
Q. HOW ARE FUTURES BROKERS REGULATED & LICENSED?
A. All futures industry related operations and personnel are strictly regulated and licensed by the CFTC - a federal agency operating at the direction of Congress. This agency works alongside to the Securities & Exchange Commission (SEC) that regulates stock exchanges and personnel. The CFTC has transferred many of its regulatory powers to the NFA. The NFA has been designated as a "registered futures association" under the provisions of the Commodity Futures Trading Commission Act of 1974. The NFA officially began operations on October 1, 1982. The primary purpose of the NFA is to ensure, through self-regulation, high standards of professional conduct and financial responsibility on the part of the individuals and organizations that are its members: Futures Commission Merchants, Introducing Brokers, Commodity Trading Advisors, Commodity.
Q. What are some common sense rules for trading?
A. 'Common Sense' Rules for Traders Divide your capital into 10 equal parts, and never risk more than 1/10 ofyour capital on any one trade. Use stop-loss orders and always protect a trade when you use a stop-loss order by using reasonable price limits. Never over-trade and adhere to your risk management rules. Never turn a profit into a loss. If you are using a stop-loss order, then raise your stop-loss so as to lock in a profit. Remember, "the trend is your friend," and never buy and sell if you are not sure of the trend according to the fundamentals and technicals .When in doubt, get out. Only trade when you feel confident about your trading strategies. Trade in the most active markets, and refrain from the slow, inactivemarkets. Also, trade the most liquid contract months.Your risk should be equally distributed. Trade in 2 or 3 different commodity products so as to avoid tying up all your capital in any one commodity. Trade "at the market" whenever possible and try to avoid using orders with a fixed buying and selling price (except a stop-loss). Establish a "surplus account" after you have a series of successful or winning trades. Your goal is to retain the "surplus account" in times of emergency or panic. Never get into the market because you are anxious from waiting, and never get out of the market just because you have lost your patience. Never buy just because the price of the commodity is "low", or sell just because the price is "high". Never change your position in the market without a good reason. If you execute a trade, base it on a fundamental reason or technical rule. And then do not get out without a definite indication of a change in trend. Do not guess where the top and bottom of the market is, but let the market prove its top and bottom. Reduce your trading after your first loss; never increase or "double-up".Perception is not reality. Only trade on "quality" advice.Avoid the natural tendency toward increasing your trading after a long period of success or a period of profitable trades. Use self-discipline as your guide when the market goes against your position. Take your loss and wait for another opportunity. Never average a trading loss. Avoid getting in and out of the market wrong, and getting in right and out wrong. This only leads to doubling your mistakes. Avoid taking small profits and big losses. Strategize according to market consensus. When too many market participants are moving the market in any one direction, the market becomes very vulnerable. Determine the make-up of open interest, utilizing such tools as the CFTC "Commitment of Traders Report". Only trade with genuine risk capital, and be aware of the risk of losing. Do not trade when you do not understand the market. Trade with confidence and conviction. Find your personal trading niche, and remain focused. Be cautious to not over extend your attention span. Do not treat all markets the same. Learn to adjust the size of your positions and the frequency of your trades for different markets. Look at all sides of the market. Try to understand why a buyer would buy, and why a seller would sell. This will enable you to be more flexible, and less resistant to change. Ignore the minor price fluctuations and place positions with the basic trend of the market. Remember, the odds are on your side when you trade with the trend rather than try to pick trend reversal points. Guessing key reversal points can be risky. Therefore, let the market tell you when it is over by a patterned reverse in direction. Always remain true to your trading plan, and follow the trading style that works best for you. This may be accomplished through the help of a broker or done independently.Never make a mistake without asking yourself why. Learn from your trading mistakes. If possible, keep a log of your trades - why you made them, what happened and why, etc. Do not establish your trading size based solely on margin requirements. Always trade within your capabilities, financial and otherwise. Put your trust in the markets, and do not be afraid when they reach historic highs or lows. Never underestimate the makeup and volume of the market’s participants. There's a lot of money out there! Remember, the key to any plan is how well it performs over time. Never let greed or fear take control over your winning positions. It is very difficult to make and keep profits by becoming addicted to either the action in minor fluctuations, or to opposing the majority just to be a contrarian. Declining volume usually indicates the market is not accepting higher or lower prices, and could indicate a turn. A market that is topping or bottoming out does not spend much time at the extremes, so there will be little volume at these points. Be flexible with your trading. This will promote your growth as a trader. Alter your plan as it suits your increasing knowledge of the markets. Finally, have confidence and believe in yourself!
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