Futures Trading Basics

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Top 4 mistakes that cause futures traders to fail

Many futures traders start trading, make some decent profits, and then, all of the sudden, encounter what seems to be an endless string of losses. These losses eat away at their trading capital as they struggle to figure out what they are doing wrong. To be successful trading in the futures market, you must know what the common pitfalls are and how to avoid them.

Common Futures Trading Mistakes

You can improve your odds of success by avoiding common mistakes many beginner futures traders make. These include:

1. Not Sticking With Your System

All successful futures traders have a system in place to help them select trades and keep losses to a minimum. However, just when a trading strategy is starting to show promise, many traders will deviate or abandon the system they are using. Doing so allows emotion to creep into their trading, which ultimately leads to losses. (Learn more about systems in our pros and cons guide to Trading Systems.)

2. Not Protecting Yourself

Futures trading (like all trading) involves a certain degree of risk, so it is important to protect yourself. There are a few ways to do this, such as using sell or buy stops to limit your losses to a comfortable level, or by using hedging strategies like buying puts. Taking steps to protect yourself will help keep losses to a minimum while maximizing profits. (To learn more, read “The Stop-Loss Order – Make Sure You Use It.”)

3. Not Staying Focused

Trading futures successfully requires your undivided attention to read and evaluate the markets effectively. Sometimes distractions are unavoidable, but you always want to have as few as possible when you are trading.

4. Not Being Open to New Ideas

The markets are always changing. No matter how great you think you are as a trader, there’s always a new idea that can help you improve your results. Too often, traders get caught up in thinking they already know enough and aren’t willing to learn anything new. As market conditions change, this type of trader is left behind with nothing to show but losses. However, if you remain open to new ideas, you will be able to change with the markets – and profit consistently, no matter what they do.

Qualities of Good Futures Traders

A good futures trader is someone who can profit in any type of market condition. Traders come from many different backgrounds and lifestyles, but most good futures traders are:

1. Independent Thinkers

Great futures traders think for themselves rather than follow the crowd. They pay attention to what is happening in the markets and the world to help inform their trading decisions. When the market is falling, they avoid panicking and turn to bearish strategies to make money. They also avoid getting too greedy in rising markets when many investors behave as if the market will go up forever.

2. Strong Analysts

To be a good futures trader, you must understand technical and fundamental analysis and be able to apply them to spot trading opportunities. If you are a beginner, gaining the necessary knowledge and experience may seem like an enormous task. But a wealth of information can be found in books, magazines and on futures-related websites. As you are learning, you can practice and hone your skills by paper trading. (For more, see “Blending Technical and Fundamental Analysis.”)

3. Active Learners

Successful futures traders never stop learning. Consider going to seminars or other events where you can interact with traders and continue your education.

4. Handy With the Tools of Their Trade

Information is key when trading futures. Make sure you have the ability to place trades 24 hours a day, have access to real-time quotes and software to help you analyze the markets, and be able to receive fast executions. With these tools, you can react quickly to changing market conditions.

The Bottom Line

Being a good futures trader means staying informed, sticking with your system, honing your skills and learning from mistakes – your own and those of others. By following these simple tenets, you can increase your odds of seeing more profits and fewer losses in the challenging-yet-rewarding futures market.

How Much Money Do I Need to Become a Day Trader (Stocks, Forex, Futures)

Capital Day Trading Requirements for Stocks, Forex, and Futures.

“How much capital do I need to start day trading?” is one of the most frequently asked questions I receive from people who want to start
day trading stocks, forex, or futures markets.

How much money you need depends on the style of trading that you wish to do, where you trade, and the market you trade (stocks, forex or futures).

Day Trading Requirements in the US and Abroad for Stock Traders

To day trade US stocks, you need to maintain an account balance of $25,000 or more. Start with at least $30,000 if you plan to make more than 4 day trades per trading week. 4 day trades or more per week gives you “day trader status” and you’re subject to the $25,000 minimum account balance. If your account drops below $25,000 you won’t be able to day trade until you replenish your account to more than $25,000. This is why it is recommended you start with more than $25,000, to give yourself a buffer over and above the minimum requirement.

You may be able to day trade other global markets without this account minimum. If the country you are in, or want to trade, doesn’t require the $25,000 minimum account balance, it is recommended you still deposit at least $10,000 into your day trading account. With smaller accounts than this, commissions and fees will significantly erode or erase profits made. On larger accounts, the costs of trading have less of an impact.

One of the common errors traders make is being under-capitalized. Losing trades and days happen, even to the best traders. After taking losses you still need to have enough money to keep trading.

I recommend risking 1% or less of your capital on a trade. Risk is defined as the difference between your entry price and your stop loss price, multiplied by the number of shares of have. For example, you buy a stock at $10, place a stop loss at $9.75, and take 500 shares (position size). Your risk is $0.25 x 500 = $125. To make trades like this you need $12,500 in your account, as $125 is 1% of the account ($12,500). That is the minimum account size you need for this trade, but in the US, you are required to have $25,000 to day trade. That means you are able to risk up to $250 per trade, and still stay within the 1% risk guideline.

For more on stock trading requirements in the US, read this pamphlet from the Securities and Exchange Commission (SEC). Here are the main points in the pamphlet:

Minimum Equity Requirement: The minimum equity requirement for a customer who is a pattern day trader is $25,000 [four day trades per week]. This $25,000 requirement must be deposited into the customer’s account prior to any day trading activities and must be maintained at all times. A customer cannot fulfill this $25,000 requirement by cross-guaranteeing separate accounts. Each day trading account is required to meet the $25,000 requirement independently, using only the financial resources available in that account.

If a customer’s account falls below the $25,000 requirement, the customer will not be permitted to day trade until the customer deposits cash or securities into the account to restore the account to the $25,000 minimum equity level.

Day Trading Buying Power: A customer who is designated as a pattern day trader may trade up to four times the customer’s maintenance margin excess as of the close of business of the previous day for equity securities. If a customer exceeds this day trading buying power limitation, the customer’s broker-dealer will issue a day trading margin call. The customer has five business days to meet his or her margin call, during which the customer’s day trading buying power is restricted to two times the customer’s maintenance margin excess based on the customer’s daily total trading commitment for equity securities. If the customer does not meet the margin call by the fifth business day, the day trading account will be restricted to trading only on a cash available basis for 90 days or until the call is met.

The “buying power” paragraph above is a little tricky to understand, but it is basically saying that US market day traders can leverage their day trading capital up to 4:1, so a $30,000 account actually allows the day trader to hold up to $120,000 in day trading positions. Brokers have their own leverage rules and may offer less margin than the 4:1 maximum.

Capital Required to Day Trade Forex

In the forex market, accounts to be opened for smaller amounts of money as it is not subject to the same regulation as stocks. Forex provides leverage up to 50:1 (higher in some countries). Increased leverage means increased risk and reward. To determine how much leverage you need, see How Much Forex Leverage.

The Foreign Exchange (Forex) market is based on the simultaneous buying of one currency and the selling of another. Currencies are available for trade 24 hours a day, 5 days a week. Being that the currency market is the largest market in the world, with daily volume of $5 trillion being bought and sold, the liquidity makes it an attractive day trading alternative.

Accounts can be opened for as little as $100, but you’ll want to start with at least $500 in order to be able to place day trades with proper stop loss levels.

With that amount of money you aren’t going to make a living from the markets. Though, you may make a few dollars a day which will grow your account over time.

If you want an income from forex day trading, start with at least $1000, and preferably $3,000 to $5,000. This amount allows you to potentially start building a monthly income, which is what most day traders are after. For more, see How Much Money Do I Need to Trade Forex?

Capital Required to Day Trade Futures

Futures contracts are popular because futures day traders don’t need to maintain the $25,000 account minimum that is required of US stock day traders.

Futures contracts are traded on all sorts of products, such as oil, gold, natural gas, and stock indexes.

To day trade futures most brokers only require a minimum deposit of $1,000. In order to day trade an E-mini S&P 500 (ES) futures contract–one of the popular futures contracts for day trading–most brokers require you have at least $400 or $500 of available capital in your account to take a one contract trade. This is called day trading margin.

Opening an account with only $1,000 isn’t recommended.

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Open a futures account with at least $8,000 or more if day trading ES futures. For other futures contracts, your broker may require additional margin, so you may wish to start day trading with at least $10,000 to give you some flexibility in what you can trade.

Using a risk-controlled strategy you can start to build an income off of $8,000, while still only risking about 1% of the account per trade.

Final Word On How Much Money It Takes to Day Trade

Day trading stocks is capital intensive, as you’ll need to maintain at least a $25,000 account balance for US stocks. Make sure you deposit more than this to give yourself a buffer. Fall below the minimum balance and you can’t day trade.

Forex provides a less capital intensive way to day trade. While the capital requirement is far less, starting with at least $1,000 or more is recommended.

For futures trading, if you trade a contract like ES, start with $8,000 or more. Each contract has different margin requirements, so if trading different contracts start with $10,000 for some flexibility.

Before risking real capital and making a deposit with a broker, create a trading plan and test it out in a demo account. Be profitable for at least a couple months in a row before opening a real day trading account. This gives you time to see where you need improvements.

Trading takes time to learn. Budget at least 6 to 12 months to learn how to day trade consistently.

By Cory Mitchell, CMT, on Twitter @corymitc and in my free swing trading Facebook group.

Over 300 pages of Forex basics and 20+ Forex strategies for profiting in the 24-hours-a-day Forex market. This isn’t just an eBook, it’s a course to build your skill step by step.

Get Started Trading Futures

Ready to get started trading futures? Here are five steps we recommend you take first.

Stay Informed

Sign up to receive our daily futures and options newsletter, In Focus.

1. Make Sure You Understand How Futures Contracts Work

Futures differ in important ways from stocks, ETFs and other instruments: trading in tick increments, margin levels, and so on. Be sure to understand how futures work.

2. Select a Few Markets You Want to Trade

Before trading, pick a market or two in which you’re interested. Understand the fundamentals behind prices. Watch and learn the markets by using our educational content, news, research and commentary.

3. Construct a Trade Plan

Before you enter a trade, first develop a plan to guide your decision-making process. Your plan should be based on careful analysis of the markets you intend to trade. Some questions to answer:

  • What is your objective for the trade?
  • How much risk is in the trade?
  • How much risk are you willing to accept?
  • What types of orders will you use?
  • How will you monitor market developments and price movements?

4. Practice Trading on a Simulator

Become familiar with the markets you plan to trade before you trade. One way is with an electronic trading simulator that replicates real-world trading conditions. It’s a good way to get familiar with price quotations, market terminology and the market’s general behavior.

5. Select a Broker and Establish a Futures Trading Account

In order to trade futures, you must open an account with a registered futures broker who will maintain your account and guarantee your trades. In the futures business, brokerage firms are known as either a futures commission merchant (FCM), or an introducing broker (IB).

Many securities brokers are also registered to deal in futures. You may want to see if your current broker can provide you with this service. Working with a knowledgeable broker and quality firm can play an important role in your long-term success.

Contact several brokers until you find the right combination of cost and service for your needs.

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