Beginner's Guide To Trading Futures: A Real-World Example
Now that you are more familiar with the concepts and tools of trading futures, let's take a look at a hypothetical step-by-step example.
Step 1: Choose a brokerage firm and open an account - For this example, we will use brokerage firm "XYZ" and open an account.
Step 2: Decide which category of futures to trade - For this example, let's choose to trade metals futures.
Step 3: Decide what instrument to trade within your chosen category - Let's choose gold.
Step 4: Conduct research on your chosen market - This research might be fundamental or technical in nature depending upon your preferences. Either way, the more work you do, the better your trading results are likely to be.
Step 5: Form an opinion on the market - Let's say that after doing our research we decide that gold is likely to rise from its current level of around $1675/oz. to around $2000/oz. over the next six to 12 months.
Step 6: Decide how best to express our view - In this case, since we think the price will rise, we want to buy a futures contract on gold - but which one?
Step 7a: Evaluate the available contracts - There are two gold contracts. The standard contract covers 100 ounces, and the "E-micro" contract covers 10 ounces. In order to manage our risk in our initial foray into the futures market, we will choose the E-micro contract.
Step 7b: Evaluate the available contracts - We next choose the month in which we want the contract to expire. Remember, with futures it isn't enough to get the direction of the market right, you also need to get the timing right. A longer contract gives us more time to "be right" but is also more expensive. Since our market view is for a move higher in 6-12 months, we can pick a contract expiring in four months, eight months, or 10 months. Let's choose 10 months.
Step 8: Execute the trade - Let's buy a 10-month E-micro gold contract. For this exercise, let's assume we pay a price of $1680.
Step 9: Post initial margin - In this case, the current exchange requirement is $911.
Step 10: Set stop loss - Let's say we don't want to lose more than 30% of our wager, so if the value of our contract falls below $625 we will sell.
Step 11: Monitor the market and adjust position accordingly.
Note: This example is purely hypothetical and is not a recommendation or opinion. These are basic steps for executing a futures trade and you may find that a different process works for you. As you gain more experience and knowledge, you are likely to develop your own system that you are comfortable with.
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