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How do You Trade Futures?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 June 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Trading futures is one of the ways that many investors manage to create and maintain an impressive investment portfolio. While there is usually the need to secure the services of one or more reputable futures brokers in order to identify the most viable options to consider, there are also a few ways that even a novice investor can approach the task of investing in futures. Here are three simple strategies to consider if you want to trade futures.

One popular approach is to base your futures trades on data that helps you to identify and track specific trends within a given commodities market. Having a firm grasp on the major trends present today can make it easier to project which futures options are likely to earn a significant return in a specific period of time. This approach relies heavily on understanding the nature of the market and also the ability to chart data while paying little attention to some of the hype that goes on in all sorts of trading activity. In order to trade futures effectively, consider placing stop losses just below the trend line to protect your interests.

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Along with understanding the current trend or trends present in the market place, there is also the need to grasp the cycles that apply to each of these trends. Keep in mind that the length of the cycles will vary. A timely cycle for commodity futures for metals such as gold or silver would be very different from a balanced cycle for grains and livestock futures. When applying this strategy, focus on the reliability of the cycles: are they consistent over a period of time? This allows you to trade futures in a way that makes it possible to diversify your investments and provide some protection as a result. Investing in several futures options that tend to follow an identical cycle could lead to major losses in a short period of time, if those options all dropped during the same cycle.

A third way to trade futures involves taking into consideration the seasonality of a given market. This approach calls for a little more intuitive thinking and a little less relying on current market trends to make your decisions. Instead, seasonal trading involves taking a look at how each market performs during various times of the year. Trading of this type requires a historical pattern that is more or less consistent. No major changes in political or environmental factors that would adversely affect performance can be indicated if the investor is to trade futures with a relatively solid assurance that he or she will be able to earn returns that are in line with past performance.

As with any type of investing, it is important for the investor to understand the degree of risk present with using all trading systems, and be prepared to absorb losses from time to time. The goal is to minimize those losses while at the same time making gains with other investments, creating an overall increase in the net worth of the portfolio. When you trade futures with this in mind, your chances of success are significantly increased.

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