What You Need To Know To Get Started Trading Futures Online
Futures trading online is an exciting opportunity for individuals to speculate on the global financial markets. It’s accessible to anyone who is willing to learn and develop a good trading strategy, regardless of their education or career background. it does not require significant upfront investment, particularly if you choose to work with a prop firm.
For those who can prove their skills, trading futures online can become a lucrative second income stream or even be a gateway to a whole new career, with minimal personal financial risk. Here’s a guide to the first steps you need to take to get started as an online futures trader.
Understanding futures
Although futures trading is opening up as an option to a much wider range of investors, it’s not a new form of trading. It first emerged in the 19th century as a way to allow farmers to sell their produce on the markets at a guaranteed price. It involves a contract between the buyer and seller to transact an asset at a fixed price on a predetermined future date.
This allows sellers to hedge against future falls in the price of the asset, and for buyers to hedge against potential future price rises, or to speculate on prices rising after they have purchased the asset in order to sell it at a profit.
For example, you might have a futures contract to transact 1,000 barrels of oil. This could either be to sell at a fixed price point in the future if you believe prices will fall, or to buy at a fixed price point if you believe from your market research and analysis that prices will rise by the agreed transaction date. This locks in the price and hedges against sudden swings.
What are futures assets?
Futures assets are commodities such as oil, forestry, coffee, livestock, gold, and grains; and also financial asset classes such as foreign exchange, cryptocurrencies, stock indexes, bonds and shares. Traders can specialise in a particular asset, or create a diversified portfolio to manage risk and take advantage of a wider range of market conditions.
What type of parties partake in futures trading?
Sometimes, the trading parties are businesses who need to take physical delivery of the underlying commodity because it’s required for them to operate, such as a coffee shop chain who wants to lock in the price of coffee beans.
However, the trading parties can also be speculators or investors who do not intend to use the commodity or financial asset for any other purpose than to profit from price changes in the contract itself. This means that they do not need to deal with the administration costs of delivery, storage, or transportation of the commodity.
The advantages of futures trading
High leverage
For speculators, one of the biggest advantages of futures is the high amount of leverage available (leverage is borrowed money, such as funds supplied by a prop firm). This allows them to control a large contract value with a smaller amount of capital. This increases the potential profit size on a trade, but also heightens the risk of greater losses.
Portfolio diversification
Futures trading allows individuals to trade across a wide range of markets and asset classes, allowing them to take advantage of different market conditions and diversify their portfolios. This opens up greater opportunities for profit making, and helps to manage risk.
Round the clock trading hours
The futures markets are global and it’s possible to trade at almost any time of the day or night, wherever you are in the world. This opens up the possibility of more flexible trading styles, allowing the investor to take advantage of unexpected market movements outside of their regular trading window.
It also means that individuals who want to combine trading with a full-time job can have access to the markets at a time that fits in with their schedule. This makes futures a very attractive option if you are looking for a way to supplement your income as you work from home or any other location of your choice.
The futures markets also have high liquidity, which means that due to the high volume of daily trades, there will always be a plentiful amount of buyers and sellers available. This minimises volatility and allows transactions to be completed swiftly.
A well-regulated market
Most futures are traded through a centralised exchange that are regulated by accountable bodies. This means that trading conditions are transparent, and the risk of unfair practices is minimal.
How to get started with futures trading
We’ve already explained the basics of what futures trading is, who does it, and the main advantages. The next step towards a career as a futures trader involves learning the key terms.
Margin and leverage
Margin refers to the initial upfront payment a trader must place in an account in order to open a futures position: it’s basically a deposit. In futures, initial margin requirements are low. They are calculated as a percentage of the total value of the futures contract, and typically are around ten per cent, although it can be even lower than this.
The maintenance margin refers to the minimum amount of funds that must be kept in the account to accommodate price changes in the contract. Low margin requirements mean the trader has high leverage, allowing them to control much larger positions than the initial investment.
Contract specifications
Futures contracts are standardised documents that set out the specifications of the contract. Study examples to familiarize yourself with the content. This will include the unit of measurement, such as barrels of oil, bushels of corn, and so on. Units may also be given in metric tons, pounds, or ounces, depending on the type of commodity.
The contract will also state the quantity of goods to be delivered or settled under the contract, the currency unit of the contract, the grade or quality of the commodity if this is relevant, such as a particular grade of fuel oil. The contract value is calculated by multiplying the contract size by the contract price.
The contract will stipulate a tick size, which is the minimum price that the contract can fluctuate. It will also state if the trade will be settled with cash or the physical delivery of goods, so pay careful attention to this as it is unlikely that you will want to deal with the storage of a physical commodity or have any practical use for it.
Select an online prop firm that offers futures trading
The next step is to choose a prop firm that will offer you access to a futures trading platform. Most prop firms will require an initial fee, and they may require you to complete an evaluation program in order to gain access to a funded account. This is to ensure that you understand the trading process and are able to manage risk.
Look for a prop firm that offers competitive fees and has a clear and transparent trading policy. If you pass the evaluation phase, the prop firm may refund your fees. You’ll be given access to a funded account with a scaling profit share.
For example, when you first start trading, this may be a 50 per cent split. As you prove your skills as a trader by managing risk well and hitting your profit targets, you may be able to scale up to a maximum profit share of 80 per cent. You will also be able to trade with a larger account balance, further increasing your potential profits.
Develop a trading plan
It’s essential that you put together a solid trading plan before you begin trading on the live markets. This will ensure that you are always making rational decisions based on your research and analysis, rather than being led by your emotions or swayed by hype on social media.
You should also put a strong risk management strategy into place before you start trading. High leverage can magnify profits, but the downside is that it can also magnify losses. Therefore you should always set a stop-loss order on each trade, which will automatically execute the trade once a certain price point has been reached.
Start with a free trial on a demo account
Even with a lot of careful preparation and planning, jumping straight into live trading can be a daunting prospect. Therefore it’s a great idea to look for a prop firm that offers a free trial with access to a trading account in simulated market conditions.
This will give you the chance to familiarize yourself with the trading platform and test out your trading strategy without the pressure of risking real money. When you are ready to try the evaluation program or move to live trading, you’ll feel a lot more confident and well prepared.