If you are attracted to the action and profit potential of futures trading, how should you get started? Here is a multi-step plan of attack that will get you off to a strong start:
1.) Learn the mechanics of the futures markets and futures trading. Everyone wants to skip this step!! You can begin separating yourself from the competition by taking this step seriously. I suggest buying a used study manual for the series three licensing exam (Futures broker exam) and working through it. If you are serious about making money it is a good idea to get the market mechanics down cold. What percent of new futures traders are this thorough? I would guess close to zero. The sooner you separate yourself from the pack, the better.
2.) Observation: This can begin at any time and should be ongoing. If you do not enjoy tracking market action and making observations, trading might not be the right opportunity for you! Start a market notebook and record your daily observations. If you think you see a pattern, write it down. (Step four will give you some ideas on what to be observing) An advanced form of observation that I recommend is to obtain backtesting software to test your observations. How to backtest a strategy so that the results will be useful is a huge topic in and of itself. Remember: There is no harm and much to gain from proceeding slowly as you build your knowledge (...Something very hard or impossible to do for most new traders, who are eager to jump into ring!) If you choose to backtest your ideas, the exact platform that will be right for you will depend on your level of technical sophistication and the type of ideas you are interested in testing.
3.) Education: One good route to getting started in your search for profitable ideas is through books, trade services, and perhaps some seminars. Don't spend a fortune though. Some books and perhaps a few well chosen courses is more than enough. You will have to use your common sense to determine which products and educators are most likely to have merit, and which ones will not. I will tell you this: Apply the same criteria to how you evaluate these products as you would any other product. Is the instruction clear and unambiguous? Is there a rationale for why the concepts work or might make money? Are the ideas clear enough so that you will be able to track them and validate them on your own? One tip here: The best strategies are usually fairly simple and easy to explain. Your strategy should include buy and sell rules, and the methods you will use to manage risk.
4.) Funding your venture: Spend some time deciding how much risk capital will be appropriate to commit to this new venture. It needs to be risk capital. In other words, it needs to be money you are willing to risk in order to achieve the possibility of greater gains.
5.) Choose your markets, then study up on them: This choice is tied in with how large an account you will be trading and the style of trading you will be doing. For example, a large and volatile contract is unlikely to be the right choice for a new futures trader with a smaller account size.
Futures contracts can seem foreign to us retail traders, and there is a good reason for this: Contract specifications are established to appeal to and be useful to "the big guys," or the commercial interests that find the products useful in the course of managing their business. Make sure to take the time to understand the products you will be trading. I recommend purchasing a CRB yearbook to learn more details about the markets you will be focusing on. Commodity Research Bureau (CRB) is a good source of basic information on commodity markets. Lastly, make sure to study up on the events, seasons, and reports that are likely to effect your markets. This is all just part of building a context of knowledge that will be useful when you are a trader. I believe it is good to know these things even if you are a purely a technical trader.
6.) Choosing a broker: Shop around and find a brokerage that offers the level of service you need, has quality platforms, and a good reputation. If you can, sign up for a few demo accounts and try them out.
7.) Paper trading to trading one lot (one contract): Spend as long as it takes practicing with the platform you will be using to make sure you have the interface and its features down cold.
8.) When you have a clear idea of your strategy, the resources you will be using to make your decisions, and are familiar with your brokerage system, you are ready to begin trading when YOU think you are ready.
Know this: Successful trading is the domain of those who are hungry for success. It does not happen in a half-hazard fashion. I hear many traders talk of planning to "paying a tuition to the market" while learning to trade. Personally, I don't buy this notion one bit. If you are doing this to win, then play to win or step aside until you are in a position to win. Now, you may start with setbacks, or a losing period. Fair enough. Overcoming and rising up from a loss is just part of trading! The sooner you learn this, the better. Tenacity is what separates people who "have good ideas" from those who "have good ideas and can make money trading." Always, always play to win. Focus on what you are after and what you want, and execute your strategies with alacrity.
NATHAN STEWART
I am an active futures trader and investor residing in Chicago, IL.
Please visit my Blog at: http://tacticalfuturestrading.blogspot.com/.
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