HOW TO GET STARTED TRADING FUTURES STEPS TO · PDF fileHOW TO GET STARTED TRADING FUTURES STEPS TO YOU FIRST TRADE U.S. Government Required Disclaimer - Commodity Futures Trading Commission

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HOW TO GET STARTED TRADING FUTURES STEPS TO YOU FIRST TRADE

U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. Use of any information in this document is entirely at your own risk, for which Indicator Warehouse will not be liable. Neither we nor any third parties provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or suitability of the information and materials found or offered in this document for any particular purpose. You acknowledge that such information and materials may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. All information found in this document exists for nothing other than entertainment and general informational purposes. We are not registered trading advisors.

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GETTING STARTED TRADING FUTURES _________________________________________________________________________________________________________

CONFIDENTIAL | ©2009. Profitable Decisions, Inc. dba IndicatorWarehouse.com | All Rights

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Contents So, You Want to Trade Futures?............................................................................................................................................. 3

A Brief History of the Futures Markets .............................................................................................................................. 3

What Are Commodities? ........................................................................................................................................................ 4

Commodity Exchanges ........................................................................................................................................................... 5

The Anatomy of a Futures Contract .................................................................................................................................. 5

The Cost of Doing Business ............................................................................................................................................... 7

Margin .......................................................................................................................................................................... 7

Maintenance ................................................................................................................................................................ 7

Contract Size ................................................................................................................................................................ 8

Tick Size ........................................................................................................................................................................ 8

Buying - Going Long ........................................................................................................................................................... 9

Selling - Going Short ........................................................................................................................................................ 10

Tools of the Trade ................................................................................................................................................................ 11

Money ............................................................................................................................................................................. 12

How Much Money? .................................................................................................................................................... 12

Start Up Money .......................................................................................................................................................... 13

Rule of Thumb ............................................................................................................................................................ 13

Choosing a Broker ........................................................................................................................................................... 13

Commissions ................................................................................................................................................................... 15

Market Information ......................................................................................................................................................... 16

Market Reports .......................................................................................................................................................... 16

Charts ......................................................................................................................................................................... 16

Fundamental vs. Technical ......................................................................................................................................... 16

Day Trading vs. Position Trading ..................................................................................................................................... 17

Day Trading ................................................................................................................................................................ 17

Position Trading.......................................................................................................................................................... 17

How to Pick Markets to Trade ......................................................................................................................................... 19

Paper Trading 101 ................................................................................................................................................................ 20

How Long to Paper Trade ........................................................................................................................................... 21

The Basics of Money Management ...................................................................................................................................... 22

Reward vs. Risk ................................................................................................................................................................ 22

The Best Piece of Advice Ever ......................................................................................................................................... 23

Trading Real Money ........................................................................................................................................................ 24

About the Author ................................................................................................................................................................. 25

Limits of Liability/Disclaimer ................................................................................................................................................ 25




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So, You Want to Trade Futures? Ever since the movie Trading Places, where Eddie Murphy and Dan Akyroyd's characters struck it rich overnight trading Orange Juice futures the public has been fascinated by the futures industry. In fact, if you do any late night channel surfing you'll see that Futures (also known as Commodities) are once again at the forefront and gaining in popularity. While the late night TV hucksters try to convince you that "gold is poised for a tremendous move" or that you can make it rich trading the FOREX by watching two lines twist and turn, most people are very unfamiliar with what futures are. Trading futures is probably unlike anything you've ever tried before. While futures are generally grouped with other forms of investments like stocks or bonds, they are like neither.

A Brief History of the Futures Markets The Futures market, also known as the Commodities market, has been referred to as the World's grocery store. It is here that buyers and sellers get together to negotiate the value of a multitude of products ranging from cotton to crude oil. The commodity markets first began in the mid-1800's when a central exchange was formed in Chicago to allow farmers and grain dealers to get together to buy and sell wheat. The exchange originally only allowed for the immediate delivery of wheat to the buyer; however it soon evolved to allow buyers and sellers to contract for delivery of wheat at a future date as well. This is how the commodity business became known as "futures". The concept of contracting for future wheat worked well for both parties. The farmers knew in advance how much their crop would be worth, and the dealers knew how much they would be paying for their wheat. Sometimes a farmer decided that he did not want to deliver the wheat for which he had contracted, and would sell his contract to another farmer who would fulfill the agreement for him. Similarly, the wheat dealer would sometimes choose not to take delivery of the wheat he had contracted for and would in turn sell his contract to another dealer.




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It wasn't long after this that speculators saw an opportunity to make money. They began trading commodities, not to supply or take delivery, but to profit on a short term difference in prices that might develop. Thus the world of futures trading was born!

What Are Commodities? Today commodities encompass just about every aspect of everyday life, so much so that we are almost totally unaware of their existence. After all, when was the last time you gave any thought to where General Mills buys their wheat, or from where Folgers gets their coffee? Commodities literally touch every part of our lives. See if you don't recognize just a few commodities from the list below: Commodity Typical Use Corn Cereals, snacks and as livestock feed Wheat Production of cereals, breads, etc. Oats Cereals, snacks and as feed Sugar Everything from candies to vehicle fuel Coffee World's most popular beverage Orange Juice What would breakfast be without OJ? Cocoa Production of chocolate Cotton Production of textiles and clothes Soybeans Universal food, for people and livestock Gold Jewelry production Silver Jewelry production and industrial applications Copper Industrial applications Unleaded Gas Something no gas vehicle can do without Heating Oil Staying warm during the winter months Natural Gas For the other furnaces and as vehicle fuel Crude Oil Everything from fuel to plastics Cattle Steaks, hamburger Feeder Cattle Young cattle raised to replenish ranches Hogs Pork Pork Bellies Also known as bacon Lumber Building houses, furniture, etc. US/Canadian/Euro/Pound Currency Futures… who needs Forex? And this is just the tip of the iceberg!




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Commodity Exchanges All commodities are traded in specialize centers known as Exchanges. The exchange governs all the aspects of trading and acts as a venue for buyers and sellers to get together as well as a "clearing house" to settle all the transactions. The exchange also sets the trading parameters for each of the commodity markets. This way buyers and sellers know exactly what they are contracting for when they trade futures. While there are smaller exchanges throughout North America the major commodities exchanges are located in Chicago and New York. The biggest exchanges are:

1. CME- Chicago Mercantile Exchange - Most of the grain markets are traded here along with meats and many of the currency and index markets. (http://www.cmegroup.com).

2. ICE - Intercontinental Exchange - Deals primarily with the "Softs", including sugar, cocoa,

coffee, and orange juice as well as Crude Oil, other fuels, precious metals and the Russell stock index (http://www.theice.com).

The Anatomy of a Futures Contract Most people assume that trading futures is similar to trading stocks, bonds or other investments. This is not true. In fact, there are several key differences that make futures unique. It's a Contract... First off, as the name suggests, a futures contract is a contract for something in the future. In the world of futures trading you do not actually own the commodity you are trading; rather you enter into a contract to buy or sell it. This is an important difference to grasp. You own stocks (and other investments); however you contract for futures. Furthermore, because you are dealing with contracts, this means that for every trade there must be a buyer and a seller. This is why futures are often referred to as a zero sum trades, because there are parties on both sides of the trade. This means is that for every dollar one trader earns, the trader on the opposite side of the trade, is losing a dollar. In the Future... All futures contracts have specific delivery dates attached. This is why futures are referred to by the months they have assigned to them.


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For example, if you are trading a March Sugar contract, this means that you are trading a contract in which sugar is scheduled for delivery in March. With Specific Dates... Because futures contracts have specific delivery dates, the exchanges also set expiration dates for each contract. The dates outline when the commodity is to be delivered as well as when trading for that month ceases. FND refers to the First Notice Date. This is the last day that all buyers holding long positions1, who do not want to take delivery of the commodity, have to exit the market. If you are in the market with a long position after FND, it will be assumed that you will want to take physical delivery of the commodity. If you find yourself in the position of being long a market after FND and you do not want to take delivery, your broker can usually make some arrangements to get you out of your fix - but it is a hassle and there are usually penalties and extra fees involved. LTD stands for Last Trading Day. This is the last day that all sellers holding short positions2, who do not want to make good on delivery, have to exit the market. As with the FND, if you are in the market after LTD it will be assumed that you are going to supply the commodity when it comes due for delivery. Again, if you make a mistake and find yourself in a market after LTD your broker can probably help you out; however it is not a pleasant situation to be in and is best avoided. As an aside, you normally want to exit your contract when there are about 2 - 3 weeks remaining on it. After this time the market becomes "thinner" as traders exit in anticipation of expiration. Fewer traders could mean difficulty exiting at a good price; therefore it is best to avoid the rush and plan to leave the market earlier rather than later.

If you are long a market you are a buyer.

If you are short a market you are a seller.




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The Cost of Doing Business Unlike stocks where you actually buy the stock you are interested in, in futures you need to put up a deposit in order to be able to control that contract. These deposits are known as margin and maintenance and are established by the exchange on which the commodity trades.

Margin Margin is the initial amount of money you must deposit with the exchange in order control one futures contract. If margin for corn is $540 that means you must deposit $540 for each contract of corn you wish to trade. Therefore if you wanted to trade two corn contracts you would need to deposit $1080 with your broker, three would require $1620 and so on. Because margin is a deposit and not a cost, you receive the margin back when you close out your trade (less losses, commission and brokerage fees).

Maintenance Maintenance is the minimum amount of money you need to have in your account in order to keep control of your futures contract. Maintenance is normally less than the initial margin amount. If margin for corn is $540 and maintenance is $400, this means that you need to have at least $400 in your account for each corn contract you control. If your account balance dips below the maintenance requirements, you will get a phone call from your broker requesting that you deposit more money into your account. This is known as a "margin call". If you are unable to maintain your margin (the maintenance amount) then you will be forced to liquidate your position(s). Margin and maintenance amounts are not fixed and can fluctuate depending on the behavior of the commodity. While this does not happen often, if a particular commodity is behaving wildly, then it is not uncommon to see exchange raise the margin and maintenance requirements. This is the exchange's way of protecting themselves and other traders by making sure there are enough funds available to cover larger price swings. Likewise if a volatile market begins to settle down, the exchange may decide to reduce the margin and maintenance amounts. To determine the current margin/maintenance requirements for the commodity you are interested in, consult your broker or check the website of the exchange on which the commodity is traded.




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Contract Size Since futures are contracts, the size of the contract is also known in advance. The contract size is fixed and is predetermined by the exchange. For example, in the corn market, each futures contract represents 5000 bushels of corn. This is a pretty standard size for many of the grain markets. Wheat, oats and soybeans are also traded in 5000 bushel lots. Cattle, Hogs and Pork Bellies are traded in 40,000 lbs. contracts, but Feeder Cattle are traded in 50,000 lbs. contracts. Heating Oil and Unleaded Gas are traded in 42,000 gallon contracts but a Crude Oil contracts are for 1000 barrels. Contract sizes can vary between markets so be sure to check with your broker for the particulars of the commodity you are interested in trading.

Tick Size Commodity prices rise or fall in minute increments loosely called "ticks". Depending on the market, a tick might represent a price movement in cents or points. The easiest way to determine your profit/loss for your trade is to take the number of ticks the market moved during the day and multiply it by the price per tick. To determine the tick value for any commodity begin by taking the contract size and dividing by 100 cents to get the dollar value per cent. Then divide the result by 100 points to get the dollar value per point or tick. For example, the Swiss Franc market trades in 125,000 SF per contract. Therefore to get the dollar value per cent you would need to divide 125,000 by 100 cents (per dollar). Therefore, the value of a one cent move in the Swiss Franc is $1250.3 Each cent in the Swiss Franc is also made up of 100 points per cent. So to arrive at the value per point, or tick, you need to divide $1250 by 100 points (per cent). This would give you a point value of $12.50.4 Therefore, for each point the Swiss Franc moves in your favor, you have earned $12.50. If it manages to move a whole cent, or 100 points, you have made $1250. If it moves two cents: $2500, and so on. This method of calculation works the same for all commodity contracts. Fortunately however, many charting software applications automatically display the point/tick value for you, making calculating profit and loss much easier.




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Buying - Going Long Most new futures traders are quick to catch on to the concept of buying long. When you buy a market (called going long), you are expecting prices to rise. This is similar to the old stock market strategy of "buy low, sell high", and intuitively makes sense. For example, let us say that July Soybeans are trading at $12.60 per bushel and you expect that prices are about to rise. Therefore you would call your broker and buy (long) March Soybeans from 1260. (Sometimes it is easier to delete the dollar and cents, as it is only the absolute price we are interested in).




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A few weeks later the market rallies and prices go higher to 1370. This represents a 100c per bushel price increase in soybeans and each cent is worth $50. Therefore, if you offset your position at this point, you would profit $5000 per soybean contract (100 cents x $50/cent = $5000).

Selling - Going Short While buying commodities at a lower price and selling them at a higher price makes sense to most people, the concept of selling a market, known as shorting, is foreign to most new traders and can be a little more difficult to grasp. Selling a market is easier to understand if you keep in mind that you are dealing with contracts and not the actual commodity itself. You never own the underlying commodity; rather you only contract to buy it, or sell it (i.e. supply it), as the case may be. Therefore if you thought prices were going to fall, you could enter into a contract to supply the commodity at one price, hoping that prices would come down, so that you could buy it back at a lower price and profit from the difference. For example, it is middle of May and you think that the Cotton market is topping out. July Cotton (that is cotton which is due for delivery in July) is currently trading at 88 cents per pound, and you think prices are ready to come down; therefore you could sell the market and contract to supply cotton at 88 cents. You call your broker and tell them you want to short July Cotton from 88.00. Remember, it is only May and you will not have to "supply" the cotton until the contract comes due in July; therefore you have that long to hopefully make a profit. If the price of cotton drops, as you suspect it might, you can buy back the cotton you've already committed to supply, at a lower price (offset your position) and profit from the difference!




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Therefore, if you sell July Cotton at 88.00 and a few days later the market falls off to 82.00, which is a difference of 6 cents or 600 points. Each point in Cotton is worth $5; therefore this move has earned you $3000 per contract. - (600 points x $5/point = $3000)

Tools of the Trade Now that you have a basic understanding of how the futures market works, it is time to get a little more in depth and take a look at what you will need in order to begin trading. There are essentially three things required to trade:

money

an account with a brokerage

charts and/or market information




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Money The number one ingredient required for trading is money, and lots of it. The lack of capital is the number one reason that traders fail at trading. When it comes to starting capital, more is definitely better. Many new traders enter the world of futures trading terribly undercapitalized. Unfortunately most people know, or have heard of, somebody (usually a friend of a friend of a friend) who struck it rich in futures with only a few hundred dollars startup money. Naturally they think this will happen for them also. While it is certainly possible, don't count on it. Futures are highly leveraged and this means that small moves can amount to either big profits or big losses. Furthermore, not having enough money to trade with can severely limit the markets you are able to follow. Even the most modest commodity markets usually have margin requirements around $500 per contract. And while margin is technically a deposit, the fact remains that you still need to put the money "up front" before you can trade. More importantly however, not having enough money will make it impossible for you to ride out the "rough" spots that will inevitably come your way as a trader. Losses are a part of trading. They cannot be avoided and you should prepare for them. The key to successful trading however is to keep your losses as small as possible while keeping your profits as large as possible.

How Much Money? So how much money is enough? Well that depends on how much you can afford to lose. Seriously… You should only trade futures with pure "risk capital". If you don't know what that is, risk capital is money that you could put into a paper bag and throw into a raging fire and only feel a little regret for doing so. Never, ever, trade with money you cannot afford to lose. This means you should never trade the mortgage money, grocery money, your children's college fund or your retirement savings, in hopes of striking it rich trading. One thing I can guarantee is that if you do, you will almost certainly lose that money. Making you aware that trading futures is a "high risk" venture is not just a regulatory requirement, it is a fact.

Only trade with money you can afford to lose without it severely impacting your lifestyle. This is very important and cannot be overstated.




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Besides, trading with purely "risk capital" makes it much easier to make clear decisions about your trades, which will be nearly impossible to do if you were trading with money you needed to live on!

Start Up Money Generally speaking, you should begin with no less than $5000. This should be your absolute minimum. While $5000 is a lot of money, it is not a lot of money in the futures world. In fact, starting with $5000 will put you at a bit of a disadvantage and will require astute money management on your part to make it grow. With a $5000 account you should concentrate on trading the smaller agricultural commodities and other lower margin markets. These markets are usually less volatile and can be traded with less money at risk. Having $10 - 20K in risk capital is much better. This amount of money will allow you to follow most markets, and in many cases trade multiple contracts. With careful money management you should be able to endure several smaller losses without having it adversely affect your account.

Rule of Thumb As a rule of thumb, you should have no less than $5000 or 5 times the margin requirement of the contract you are considering trading - whichever is greater. This means that if you are considering trading a market like corn, where the margin is $540, having a $5000 account is the bare minimum you should consider trading with. But if you were interested in trading Cotton, where the margin is currently $2400, you should have no less than $12,000 in your account.

Choosing a Broker Whether you ultimately decide to go with a full service, discount, or electronic brokerage when choosing a broker you need consider more than just the commission price.

When considering a broker you should first consider the brokerage. Does the brokerage have a good reputation? Have there been problems with other clients that have not been resolved? The NFA (http://www.nfa.futures.org) acts as the Better Business Bureau for brokerage firms trading in US markets and you can contact them to find out if there are any black marks on the record of the broker or brokerage you are considering using.




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Secondly your broker should show proficiency for his craft. Some brokers specialize in one market and others have more general knowledge. Some can relate better to day traders and others to position traders. Some love to do spreads; others are whizzes at option trades. Whatever the case make sure they know what they are talking about, and that they will be able to help you with the types of trades you intend to do. In fact a good broker will try to find out what your trading style and objectives are, but either way, don't be shy about asking questions from your prospective broker to make sure they know the subject of trading inside out. Asking questions of your potential broker at this point should help you weed out the brokers from the "salesman". Not all people who work at brokerages are brokers. Some are little more than salesman with little or no trading experience. The main job of the salesman broker is to "churn you" which is a cryptic way of saying they try to get you to trade more often. After all, the more you trade, the more money you generate for the brokerage; however this strategy will usually have the inverse effect on your trading account. Lastly, you have to have a good report with your broker. You have to like them. You have to feel that they have our best interest at heart. Don't lie to your broker. You should feel that you can ask them any question you want without feeling "dumb". If the only trading education you've had is Ken Robert's or Larry Williams, don't try to hide it from your broker, chances are he can see you coming anyway. While your broker is technically your employee they should also be your "friend". One of the best analogies I have heard is that a broker is like a golfer's caddie. Ever wonder why all those professional golfers have caddies? Well, a good caddy does a lot more than just carry the player's bag all afternoon. While the final decision is always the player's, a good caddy will help the player develop their overall course strategy as well as helping with club selection, reading the greens, etc. I've heard it said that if an amateur player had the assistance of a caddy they would immediately take 6 - 10 strokes off their score without doing anything else different. This is how much of a difference it can make to have an expert on your staff to help you choose the right clubs, read the greens, etc. A winning caddy is not cheap however. A good caddy typically earns 10% of the player's winnings. Tiger Woods' caddy is a millionaire. Does this mean that brokers know where the market is heading next and you should subject your opinion to theirs? No, it does not. In fact I do not know of one good broker who pushes their opinion on their clients, but don't ignore the help that a good broker can provide to you, especially if you are just starting out.




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No matter whether you ultimately decide to trade with a full service, discount or on-line broker, take your time choosing a good broker/brokerage. While it does not guarantee success it is just one more thing that can help diminish the odds of failure. Indicator Warehouse recommends NinjaTrader Brokerage, you can more information by clicking here.

Commissions Broker commissions will be one of your biggest expenses as a trader. Compared to stock market commissions, futures commissions are quite high and are usually quoted round turn and per contract. Round Turn is the phrase used to describe the cost of getting you into and out of your trade, and is how most commissions are quoted. Sometimes commission rates will be quoted "per side" to make them sound more reasonable. If the commission rate is per side you will need to double it to get the round turn rate. Commission rates will vary depending on the type of service the broker has to provide for you. While brokers want your business, if your trades require more of their time, they will have to charge you accordingly. Simple electronic trading, where you do everything from planning the trade to executing the order yourself, can be done for as little as $10 (or less) round turn per contract. Broker assisted trades, where you tell the broker where you want in, where you want out, and leave the execution of the order to him, can usually be had for about $35 round turn per contract. The more broker intensive trades, where you may have your broker adjust your stops, as per your plan, or where you work through the trade with your broker will normally run you $40 - 60 round turn per contract, again depending on the amount of work involved. Not so long ago one brokerage was charging its new clients the exorbitant fee of $100 round turn per contract! While these rates were bordering on criminal, since the brokerage catered primarily to new traders, and most of them did not know better, they subsequently paid the ridiculous rate.


https://www.indicatorwarehouse.com/support/info-about-brokers-data-feeds-and-trading-platforms/



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As a rule of thumb, your commission rate will roughly approximate the amount of your account you will pay in commissions over the year. Therefore if the commission is $35 round turn, you will approximately pay 35% of your account to your broker. While commissions shouldn't be the deciding factor, you can see that they do add up. Don't be afraid to shop around. There are plenty of brokers and brokerages to choose from. 7 $10 round turn in the electronically traded markets, $20 round turn in the open out-cry markets.

Market Information The last ingredient you will need in order to trade commodities is to have access to market information. Market information usually comes in two forms: market reports and charts.

Market Reports Market reports are available through the various government reporting agencies that have to do with the commodity markets. These reports are usually free and can even be emailed to you if you subscribe to the mailing list. The USDA http://www.usda.gov is the branch of the government responsible for compiling and publishing these reports. The Economic Research Service http://www.ers.usda.gov and the National Agricultural Statistics Service http://www.usda.gov/nass are two of the more popular commodity reporting sites under the USDA.

Charts If you are going to be serious about trading you should really consider getting a subscription to a decent charting service. NinjaTrader charts are free to use for simulated trading. You can download the software for free here: https://www.indicatorwarehouse.com/partners

Fundamental vs. Technical There are essentially two approaches to trading futures: fundamental analysis and technical analysis. Fundamental analysis has to do with studying market conditions and trying to interpret how these will affect the market. Fundamental traders normally follow market reports quite closely and have a good working knowledge of the market. Generally speaking, fundamental traders who are not trading in the pits have a longer market outlook and are not too concerned with the daily fluctuations in price. For this reason,


http://www.usda.gov/

http://www.ers.usda.gov/

http://www.usda.gov/nass

https://www.indicatorwarehouse.com/partners



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fundamental traders normally have "deeper pockets" which enables them to ride out minor market swings. Technical trading has to do with chart analysis. There are hundreds of different technical trading systems that have been developed over the years to try and predict what the market might do next. Technical traders believe that all relevant market information is contained in the price on the chart and therefore fundamental information is redundant. Technical traders usually base their decisions on past events, or predictable market formations as portrayed in the charts. Generally speaking, technical traders focus on a shorter time frame than their fundamental counterparts. Most new traders are attracted to the technical side of trading. While the fundamentals might "make sense", learning to decipher market reports and accurately interpreting market conditions can take years of experience to master; technical trading, on the other hand, can be learned in a relatively shorter period of time.

Day Trading vs. Position Trading Most traders can be roughly divided into two groups depending on their trading time frame: day traders and position traders. It is important to note that one time frame is not better than the other as there are pros and cons for both. The question of "which is best?" really boils down to the individual trader's preference and abilities.

Day Trading Generally speaking, day traders only trade during the day and rarely hold positions overnight. In order to day trade you need live data to be able to follow the market throughout the day. Day traders normally try to capitalize on smaller market moves that occur during the trading session. Day traders have to be able to make quick decisions and therefore many day traders trade electronically because they need to be able to enter and exit the market as quickly as possible. Because their positions are closed out before the end of trading, day traders normally have lower margin requirements than position traders. Typically the exchange will only require 30% of the regular margin in order to day trade a market. Not all markets lend themselves to day trading however. Day trading works best in the more volatile markets, like Bonds or the S&P where the market will move enough during the day to make trading it worthwhile.

Position Trading




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Position trading is the term used to describe everything other than day trading. Position trader's duration of trading varies in length; however most position traders will hold their trades for a few days to a few weeks. Some long term position traders may hold their trades for several weeks, or even months, but these are usually the exceptions and not the norm. Position traders normally try to capitalize on larger market moves than day traders do. Most people who work during the day, or trade part time, are position traders. As a rule, most position traders are not able to, or do not have the inclination to watch the market tick by tick during the day. Because their focus is on a longer time frame, position traders are not usually as rushed to make decisions as their day trading counterparts. Many position traders will use brokers to execute their orders; although some prefer to use electronic orders as well.




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How to Pick Markets to Trade Choosing the right markets to trade will depend on your account size as well as your trading style. If you have a larger trading account, more markets will be available to you. Likewise you will want to focus on a different group of markets if you are a day trader than you would if you were a position trader. Lastly, choosing markets to trade will depend on how much time you have to follow them. The more money you have in your account, the more markets will be available to you. If you are trading with a $5000 account there is no point in becoming familiar with a market like Crude Oil that has a margin of $3375 per contract! Assuming that you are a smaller trader, you will be most interested in the lower margin markets like the grains, some of the meats, maybe a metal and a currency or two. I would suggest you limit your scope to about 6 - 8 markets, as these will be enough to track on a daily basis. Even real money traders rarely follow more than 8 markets...it just becomes too cumbersome, as you will find when you've got more than one paper trade going at a time. If you don't know which markets to choose I would suggest you consider the following: Corn, or wheat - these are good markets for traders of all levels, but especially the beginner. The margin is not too high and the markets normally act predictably and trend well. Corn and wheat have a tendency to move together (but not always), so watching both can be redundant. Cocoa - a good market to make money in as a small move can add up to good profits. Also can be a good market to lose money in for the same reason. I don't mind cocoa, although I know people who have sworn it off. This is the time to find out if it is for you...when it doesn't cost you real money. Sugar - a good market because it is easy to get in with minimal risk; however the abundance of support and resistance can make it confusing to new traders. I have a definite "love/hate" relationship with this market. Live Cattle - a decent meat market. Some new traders avoid the meats entirely because of their ability to make huge ranges. Cattle is the "safest" of the meat markets. Cotton - can be a good market, but is capable of making large ranges. I used to avoid cotton like the plague, but have become fonder of it in recent years.




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Soybeans - the Pork Bellies of the Grain complex. If soybeans are too volatile for you consider trading one of the bean cousins, like soybean oil, or soybean meal. They tend to mirror soybeans, but are generally lower margin and less volatile. Silver - I like the metals; however gold can be a little rich for the small trader. Silver mirrors gold - the poor man's gold. Some people like copper, but I consider it too thin and margins too high for small traders. Canadian Dollar/Australian Dollar - two of the more reasonable currency markets. The margins are lower, but there is excellent money making potential. All the currencies have a tendency to move in the same direction anyway (opposite the US Dollar) so it doesn't really matter.

Paper Trading 101 Your first step in becoming a trader is to hone your skills. Fortunately you can simulate trading without risking real money by paper trading. Most traders are anxious to trade and hurry through paper trading only to get killed in the markets. Don't skip this part of your education - it is important. To begin paper trading, fund your imaginary account with exactly as much money as you intend to begin real money trading with. Many charting programs and brokerages will have simulated trade tracking software otherwise you can track your trades using a notebook. Now that you have a paper account and a mix of markets to trade you need to begin searching the markets for trading opportunities. Once you have found a trade you like, write down your entry, your exit and your profit target. This is your trading plan. If you are dealing with a broker, you can call and ask them if your paper order had been filled on a particular day. Alternatively you can look at the charts and figure it out for yourself. Allow an extra two ticks on your fills and exits as this will simulate slippage. Don't forget to deduct your commissions and brokerage fees. Use $40 round turn per contract if you don't know what your commission will be. Track your trades day by day, keeping a journal of your profits and losses. Be sure to note what you did right, what you did wrong and what you would do differently the next time. Paper trade as much as you can - because it's free and will help you determine how many markets you can comfortably handle. See how well you can do, but be honest. Cheating here will not help you in the future.




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Don't leave your trading for a few days and come back to the charts and say "if I had exited back here I would've made a nice profit" if you did not exit your paper trade at that point. Remember, this is a dry run for what you will be doing when you trade for real, so treat it that way! I'm sure you've heard it before, but nothing changes when you begin trading with real money. If you cannot make money paper trading then chances are you won't make it with real money either.

How Long to Paper Trade

Some educators claim that you are ready to begin trading real money after three months of paper trading, but this can be a dangerous measure to use as a guide. Gaining proficiency in anything is not usually measure in terms of time, but rather results, which is why I normally suggest people track the results of their first 100 paper trades. Tracking 100 paper trades will give you a much better idea of your abilities than trading for three months. Obviously it is a simple matter to determine your winning percentage after a 100 trades by merely adding up the winners to arrive at a number. You should not be trading at less than 50% accuracy and preferably as high as 60 - 75% accuracy before you consider trading with real money. Simply having winning trades is not the only part of the equation however. You also need to make sure that your winners surpassed your losers and that you would have come out ahead in your trades; otherwise you are not ready to trade for real yet. While I understand how difficult it is to curb your enthusiasm I urge you to paper trade as long as possible. Sure you will see several market moves that you "could've made a killing" but bear in mind that the markets have been around for a very long time and they will still be there when you are READY to trade. I have seen too many traders enter the arena before they are ready to trade, anxious to make their fortune. Unfortunately they quickly became market fodder because they did not have enough "experience". Please, don't let this happen to you.




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The Basics of Money Management

Reward vs. Risk Not all trades are equal, some trades are better than others and not all trades are worth taking. Knowing which trades are the best ones to take is the difference between success and failure. One of the best ways to find the better trades is by analyzing the risk/reward ratio of each trade you are considering. There are three ingredients required to determine the risk/reward ratio (RRR): 1. Entry Price 2. Exit Price (Stop Loss) 3. Profit Target The first two variables, the entry and the exit, are used to define the risk portion of the trade. The difference between your entry and your profit target determine the reward part of the equation. Of the two halves, managing your risk is the more important of the two. Minimizing your risk exposure is paramount to becoming a successful trader, so don't take it lightly! In fact the smaller your trading account is the more important good risk control becomes. The good news is that through the use of stop loss orders you have control over your risk exposure. Learning to structure your trades properly, with minimum risk, will go a long way towards your success as a trader. As a rule you would not want to consider a trade that is offering less than a 2:1 risk/reward ratio. This means that if you have $250 at risk, the potential reward for the trade should at least be $500. This is the bare minimum return you should expect from a trade. This should be obvious. If you do not have the potential to earn more than you are risking, then it will not be too long before you have busted your account. You need to tip the odds in your favor as much as possible when trading and the best way to do that is by concentrating on the trades that offer much more than you have at risk. Ideally you want trades that offer a 3:1 RRR or better. In other words, if you have $250 at risk, the potential reward is at least $750+. Some traders feel it is unreasonable to expect this much from the market; however with good entry and exit placement it is possible to structure a low risk/high reward trades on a regular basis.




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The Best Piece of Advice Ever This could very likely be the best piece of trading advice you will ever receive. In fact, if you do not learn anything else about trading, this one tidbit of information can protect you and make it more likely that you will be on the "right side" of your trades. What is this miracle piece of advice? Simply put, it is to make the market prove you right before you ever enter the trade. So important is this concept that you should write it down somewhere in big letters so that you cannot miss it when you plan your trades: MAKE THE MARKET PROVE YOU RIGHT BEFORE YOU GET INTO THE TRADE. How do you make the "market prove you right"? Fortunately, this is not as difficult as it might first seem. You make the market prove you right by placing your entry order beyond a resistance barrier that the market must overcome before your order is filled. This resistance barrier might be a price level where the market has formed support or resistance, it could be a moving average line, a trendline or it could simply be the high/low of the previous day. The point is you need to make the market come to you whenever possible. Entering a market this way will put you on the right side of a trade more often than not. Making the market come to you is inline with the other concept that you often hear me preach about which is to develop a scenario for the market to fulfill before entering your trade. You see, most people are under the misconception that you have to predict where prices are going next in order to successfully trade the futures markets. This however, is only half the story. While it is "important" to forecast market direction, it is more important to develop a plan that ONLY gets you into the market IF the market behaves as you expected it to. If the market does not perform as you had hoped, then you are not in the trade. Sure, you might end up missing a move or two, but more importantly, you are not losing money if the market is not doing as you planned. While there will be times when you will try to enter the market early and therefore cannot wait for the market to "prove you right", such as when you are trying to capitalize on a market pullback or short term reversal, you should attempt to structure your trades to make the market come to you whenever possible. By and large, if you try to structure your trades in this way, so that the market has to come to you before your order is filled; you will have taken a giant step towards improving your chances of becoming a successful commodity trader.




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Trading Real Money Congratulations! You're ready to begin trading real money. You've funded your account and paper traded your brains out. You've developed some consistency in your trades and have at least made money on paper - now it's time for the real thing. A couple of words of advice as you enter the exciting world of futures trading. First off, realize that while paper trading can help prepare you for trading, it is not like real trading. Your emotions are bound to run much hotter when you've got your hard earned money on the line. With that in mind, try to trade for real exactly as your paper traded. Remember, with the exception of you emotions, nothing really changes when you begin trading with real money. If you were aggressive with your paper trades, then you should not begin trading conservatively; and if you were conservative with your paper trades this is no time to become aggressive. Secondly, don't be afraid to take profits. There is nothing like profits to help build your confidence, and your trading account. While you may sometime miss out on a larger move, banking consistent profits will do more to build your account than catching the odd big move. Besides, those "once in a lifetime" moves have a tendency to come around every couple of months or so in the commodity markets. Just make sure you're still around to take advantage of one. If you find that you run into trouble as you trade real money, don't hesitate to take a break and go back to paper trading until you work out the problem. If you need time to reassess your abilities, take it. It's been said a hundred times before, but the markets aren't going anywhere! Trust me; I've been around long enough to know it's true. If there was ever a business where there is another excellent opportunity just around the corner, futures trading is it. Best of luck to you! Please do not hesitate to contact me if I can be of assistance to you.




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About the Author Erich Senft is the lead day trading consultant and trade room moderator for Indicator Warehouse. Erich is a registered Commodity Trading Advisor (CTA) as well a market analyst and teacher, specializing in teaching people the intricacies of trading the markets.

Erich's love of teaching, and ability to explain trading concepts in a clear and concise manner, has made him a popular instructor among new traders and industry professionals alike. His trading manual, weekly newsletter, nightly updates and special trading reports have long been praised for being thorough and easy to understand by traders of all levels. To learn more about trading support and resistance, the manual, nightly market updates or the free Big Weekend Edition, go to the Support and Resistance website. Erich lives in the Pacific Northwest with his wife, a dog and two cats. When he's not teaching or trading you can usually find him on the golf course chasing a disobedient little white ball.

Limits of Liability/Disclaimer The author and publisher of this book and the accompanying materials have used their best efforts in preparing this program. The author and publisher make no representation or warranties with respect to the accuracy, applicability, fitness, or completeness of the contents of this program. They disclaim any warranties (express or implied), merchantability or fitness for any particular purpose. The author and publisher shall in no event be held liable for any loss or other damages, including but not limited to special, incidental, consequential, or other damages. As always, the advice of a competent professional should be sought where necessary. This manual contains material protected under International and Federal Copyright Laws and Treaties. Any unauthorized reprint or use of this material is prohibited without express written permission of the author.


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Documents

HOW TO GET STARTED TRADING FUTURES STEPS TO · PDF fileHOW TO GET STARTED TRADING FUTURES STEPS TO YOU FIRST TRADE U.S. Government Required Disclaimer - Commodity Futures Trading Commission