7 Tips Every Futures Trader Should Know

In the world of futures trading, success can mean significant profits—but mistakes can be extremely costly. That’s why it’s so important to have a strategy in place before you start trading. Here are seven tips for how to proceed.

1.  Establish a trade plan

The first tip simply can’t be emphasized enough: Plan your trades carefully before you establish a position. This means having not only a profit objective, but also an exit plan in case the trade goes against you.

The goal here is to minimize the possibility you’ll need to make important decisions when you’re already in the market with money at risk. You don’t want emotions like fear and greed dictating your moves by luring you into holding onto a losing position too long or exiting a profitable position too soon.

A carefully wrought trading plan that includes risk-management tools such as stop-loss orders, which we will discuss below, or bracket orders, can help protect you from such errors. For example, say you bought one contract of December silver at $20.00 per ounce. With a bracket order, you could set a stop loss exit at $18.00 per ounce and a profit exit at $25.00 per ounce. That way, you’re attempting to limit your risk to $2 per ounce, while maintaining a profit potential of $5 per ounce.

2.  Protect your positions

Committing to an exit strategy in advance can help protect you from 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.

To make your commitment more firm, consider trading with stop-loss orders. The idea is to decide on a bailout point first, and then 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 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 and keep 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 the cocoa market to rally. If one of those expectations proved wrong, while the other was right, you could offset a loss with a gain.

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 or 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 to “going short” a market, you might unnecessarily limit your trading opportunities. Here’s an example: Suppose a trader believes the price of crude oil is going to fall and looks to take a position by selling December crude oil futures at the current price of $50.00 per barrel, with the hope to buy back the futures contract at a later date at a profit should the futures price fall below $50.00 per barrel. 

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. There’s no practical difference between the trades: Whatever order you sell or buy in, you’ll have to post the required margin for the market you’re trading. So, don’t overlook opportunities to go short.

6.  Learn from margin calls

If you’re hit with a margin call, it’s probably because you’ve stayed with a losing trade too long. So, consider treating a margin shortfall as a wake-up call that you’ve become emotionally attached to a position that’s not working as planned. Rather than transferring additional funds to meet the call or shrinking your open positions to reduce your margin requirement, you may be better off exiting the losing position completely. 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 obviously monitor your working orders, open positions, and account balances. But don’t hang on every uptick or downtick in the market. Not only can you drive yourself crazy, but you could also be thrown by small zigzags or whipsaws that appear formidable and significant in the moment but ultimately prove to be just intraday blips.

In other words, try to maintain a little longer-term perspective. Lengthening the duration of your trades could work better than trying to trade every move in the market.