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7 Tips Every Futures Trader Should Know

Trading futures can be a complex undertaking with the potential to earn significant profits but also make costly mistakes. Whether you’re just beginning to trade futures—or you’re a sophisticated, experienced veteran—it’s easy to form bad trading habits. Laying out a strategy can put you in a better position to succeed. As with most things, preparation is key. Here are seven tips to potentially help improve your futures trading strategy.

1.  Establish a trade plan

The first tip on our list simply can’t be repeated often enough: Plan your trades carefully before you establish a position in the market. This means having not only a profit objective, but also an exit plan should the trade go against you.

Developing a trading plan that includes both a profit objective and a bailout plan can help minimize situations in which you’re forced to make important decisions when you’re already in the market with money at risk. Without a trade plan, natural emotions like fear and greed can influence you to hold onto a losing position too long or exit a profitable position too soon; however, incorporating an exit strategy using risk management tools – such as stop-loss orders, which we will discuss below, or bracket orders - can help protect you from holding onto large losses or letting large profits go.

Futures trading involves risk, so decide on your bailout plan before entering the market. A well-laid plan allows you to make important trading decisions in a calm, rational way – not under pressure. 

2.  Protect your positions

As with any trade, you should consider your exit strategy against significant contrary moves. Too many traders try to use “mental stops,” picking a price in their heads for when they will close out a position and minimize their losses. But these are too easy to ignore, even for the most disciplined traders.

Consider trading with stop-loss orders. Once you’ve decided on your bailout point, set a stop at that price.

One-Triggers-Other (OTO) orders allow you to place a primary order and a protective stop at the same time. When the primary order executes, the protective stop is automatically triggered. This frees you from having to constantly watch the market, and it relieves you from having to worry about entering your stop order at the right time.

Just remember, though, there is no guarantee that execution of a stop order will be at or near the stop price. Stops are not a guarantee against losses—markets can sometimes move quickly through them. But, in the majority of cases, a stop will help you keep your losses at a manageable level while keeping your emotions out of it.

3.  Narrow your focus, but not too much

Don’t spread yourself thin by trying to follow and trade too many markets. Most traders have their hands full keeping abreast of a few markets. Remember that futures trading is hard work and requires a substantial investment of time and energy. Studying charts, reading market commentary, staying on top of the news—it can be a lot for even the most seasoned trader.

If you try to follow and trade too many markets, there’s a good chance you won’t give any of them the time and attention they require. The opposite is also true—trading just one market may not be a terrific approach, either. Just as diversification in the stock market has well-known benefits, there can be advantages to diversifying your futures trading, too.

For instance, suppose you expected gold prices to decline, but it turns out that you’re wrong. But you also expected the cocoa market to rally, and this proves to be correct. In this case, the gains on your cocoa position could help make up for your losses in the gold market.

4.  Pace your trading

If you’re new to trading futures, don’t floor the accelerator. There’s no reason to begin trading five or 10 contracts at a time when you’re just beginning. Don’t make the beginner’s mistake of using all the money in your account to purchase or sell as many futures contracts as you absolutely can. Occasional drawdowns are inevitable, so you should avoid establishing a large position where just one or two bad trades can wipe you out financially.

Instead, start slowly with one or two contracts, and develop a trading methodology, without the added pressure that comes with managing larger positions. Tweak your trading as necessary, and if you find a style and strategy that’s working well, then consider increasing your order size.

If you’re a new futures trader or a veteran that has hit a rough patch, you might also consider downsizing your contracts. In some cases, exchanges offer E-mini futures and Micro E-mini futures products that are identical to standard futures products except smaller. The CME Group, for instance, offers an E-mini S&P 500 futures contract that’s identical to its flagship S&P 500 futures contract, except it’s just one-fifth the size. There are similar mini products in the grain, energy, currency, and metals sectors.

Once you’ve found a strategy you’re comfortable with, you can slowly increase your order size.

5.  Think long and short 

Trading opportunities present themselves in both rising and falling markets. It’s human nature to look for chances to buy, or “go long” the market. But if you’re not also open-minded to “going short” a market, you might unnecessarily limit your trading opportunities.

Remember that with futures you can sell the market or buy the market. You can buy first, and then sell a contract to close out your position. Or, you can sell first, and later buy a contract to offset your position. Whatever order you sell or buy in, you’ll have to post the required margin for the market you’re trading—there’s no difference at all. So, don’t overlook opportunities to go short.

6.  Learn from margin calls

If your account should happen to fall into a margin call, you’ll have two ways to meet the call. First, you can wire transfer additional funds, so that your account equity is brought back up to at least the initial margin level. Or, you can reduce your open positions, thereby reducing your margin requirement until your account equity is greater than or equal to the new initial margin requirement.

The important thing is this: If your account does go into a margin call, it’s probably because you’ve stayed with a losing trade too long. It may be smarter to exit the losing position, rather than wire transfer additional funds to continue holding the position. Consider the possibility that your margin shortfall is a wake-up call that you’ve become emotionally attached to a position that’s not working as planned. As the old trading expression goes, “cut your losses,” and look for the next trading opportunity.

7.  Be patient

Don’t get so wrapped up in market action that you lose sight of the larger trading picture. You should conscientiously monitor your working orders, open positions, and account balances. But don’t hang on every uptick and downtick in the market. Not only can you drive yourself crazy, but you can be thrown by small market zigzags and whipsaws that appear formidable and significant at the moment but which, in retrospect, were only small, intraday blips.

In other words, try to maintain a little longer-term perspective. You might be more successful by lengthening the duration of your trades, rather than trading excessively.

What You Can Do Next

Important Disclosure

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

Futures trading carries a high level of risk and is not suitable for all investors. Certain requirements must be met to trade futures. Please read the Risk Disclosure Statement for Futures and Options before considering any futures transactions.  Futures accounts are not protected by SIPC. For additional information on account protection at Schwab, please click here.

Short selling is an advanced trading strategy involving potentially unlimited risks, and must be done in a margin account. Margin trading increases your level of market risk. For more information please refer to your account agreement and the Margin Risk Disclosure Statement.


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