The Five Big Lies About Futures Trading

by Richard Delaney

You don't have to be a victim of the "40 - 40 - 40 plan" (40 hours a week for 40 years followed by a 40% reduction in income!), but to acquire wealth you must work for yourself, at least part-time.



If we were going to imagine the best possible business, it would have these characteristics:

* Run by YOU: no staff; no inventory; no advertising; no customers; no employees; no office; no competition

* Can be started with little money

* Can make money regardless of economic climate

* Can be done starting part-time






Is there such a business? Yes: trading commodity futures. Unlike the stock market, futures contracts represent an interest in real commodities - things people need and want: wheat, coffee, sugar, money, cotton, orange juice, lumber, heating oil, and, yes, frozen pork bellies!



Futures are the perfect business because of leverage. Leverage means you control a lot of resources with only a little of your own money.



Futures traders are not required to put up the entire value of a contract. Rather, they are required to post a margin that is typically between 2 percent and 10 percent of the total value of the contract.



For example, the margin (the amount of money you have to put up to buy or sell a futures contract) for wheat is currently $700 per contract. If wheat was selling for $3.50 per bushel, one wheat contract (5,000 bushels) would be worth $17,500. Your $700 "controls" $17,500 worth of wheat. That's a ratio of 25 to 1. Now THAT'S leverage!



Are futures traders just gamblers, speculators, crazy risk-takers? No! We're actually helping farmers, dealers, and manufacturers reduce their risk by taking it on ourselves. For this we should be rewarded (when we're right). And we are!



While it is true that futures markets can be used for speculating, that is not the primary reason for their existence. Futures markets are actually designed as vehicles for hedging and risk management, that is, to help people avoid "gambling" when they don't want to. For example, a wheat farmer who plants a crop is, in effect, betting that the price of wheat won't drop so low that the farmer would have been better off not planting at all. This bet is inherent to the farming business, but the farmer may prefer not to make it. The farmer can hedge this bet by selling a wheat futures contract. Someone has to buy that farmer's wheat contract, and that someone is us "speculators".



Unfortunately, there are a lot of people, some of them well meaning, who don't want us to succeed at futures trading. To discourage us, these people perpetuate what I call the "Five Big Lies About Futures Trading." Here they are:



BIG LIE # 1: I'll lose all my money trading futures.



THE TRUTH: You can lose all your money trading futures - but ONLY if you don't have a trading plan, a money management plan, and the discipline to stick to them.



BIG LIE #2: You need a lot of money to trade futures



THE TRUTH: Some futures contracts, especially in the grains group (wheat, corn, oats) have a margin requirement of under $1000.



BIG LIE #3: You have to be a high-powered expert to trade futures successfully.



THE TRUTH: Futures markets are very simple, and keeping up with them is also very simple.



BIG LIE #4: You have to stay glued to your computer monitor every minute the markets are open.



THE TRUTH: With some trading strategies you only have to look at charts once a day.



BIG LIE #5: The big guys get all the inside information (called fundamental analysis) before us and take all the profits.



THE TRUTH: Forget fundamental analysis, weather forecasts in Ghana, and USDA grain reports. Stick to what the market is telling you through the charts.



Futures markets are actually quite simple. For example, they can only go in three directions: up, down, or sideways.



Also, there are only three positions: long, short, or not in the market. (As Larry Williams, one of the greatest futures traders of all time, said, "Not having a position is a position.")



Commodities exchanges are closely supervised by the Commodities Futures Trading Commission (the CFTC). Commodity producers (farmers, manufacturers) use futures exchanges in order to reduce risks of price fluctuations.



To become successful at futures trading you only need to master a few basic concepts:

* What to trade, and what not to trade

* Contract specifications

* Leverage and pyramiding

* Getting in

* Protecting your backside

* Getting out

* Stop-loss orders

* Limit moves

* Reading chart patterns

* Give-back

* Paper trading

* Money management



So ignore the scare tactics, learn how to trade futures successfully, start small and trade carefully following the concepts listed above, and declare your independence from the "40 - 40 - 40 Plan"!



To learn more about how to successfully trade commodity futures contracts, visit www.Futures-Profits.com


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About the author:
The author has been analyzing and trading commodity futures contracts profitably since 1994. He quit his day job in 1998 and has been trading futures full-time ever since.

Published at Jan, 11 '07 ; read 655 times;

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