Just to complete the picture.
Ironically, when aspiring traders are starting off, the first question asked is typically not “Which instrument should I trade?”. This is because we are introduced to trading in a blunt way. For me, I attended a options trading seminar preview and was told about all the advantages of trading options. I also read about how options trading is less risky than futures trading online. That was how I plunged in. I was fortunate to have the opportunity to have a taste of futures trading through another course subsequently.
Before I discuss why I feel it is not suitable for aspiring traders to start with futures trading, let’s learn something about futures trading first.
What are futures?
Investopedia gives a good, concise explanation on what are futures. Let’s try to digest this with a simple example.
eg. Let’s say I am long 1 $X month Y frozen pork belly futures contract
1 unit of frozen pork belly will be delivered to me after the futures contract expires in month Y. I have to pay $X for the pork belly. And I am bound by the futures contract to accept the delivery, no running away.
1 unit of pork belly refers to “40,000 pounds of frozen pork bellies, cut and trimmed” if you check the CME website. That’s a lot of meat!
But few people actually buy futures with the intention of wanting pork bellies to be delivered to their homes nowadays. Futures are being used as an instrument for hedging and speculation.
Besides futures on pork belly, anything else?
Certainly, from traditional commodities such as corn, wheat, cocoa etc., trading of stock indices futures (eg, e-Mini S&P500) were also started. CME also offers weather futures! Mmm, today will be sunny or rainy?!
In my upcoming posts, the following will be discussed:
- Understanding futures contracts
- How to make money with futures?
- Why aspiring traders should not start with futures trading?
Stay tuned!
Go on to read “Why Not Trade Futures? Part 2“.
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The only way to be truely satisfied is to do what you believe is great work and the only way to do great work is to love what you do… - Steve Jobs
I used to be a futures broker in my previous job, and I can tell you that 95% of futures traders lose money. Most of them trade based on their feeling on where the market is going, or based on some news in the market, or based on some news.
In my view, to be a successful futures trader, you must have a system. If you are trading commodity futures, find out the seasonal effect of the commodity you are trading.
For example copper tends to fall after October, that is because copper demand is the least during this period. See here: http://www.commoditiestradingpro.com/2008/08/life-cycle-of-copper.html