Futures Trading, Is It The Best High Yield Investment? Yes And Heres Why
Futures trading could be the best high yield investment your ever going to find, but trading futures with little experience by yourself or without a proven strategy is like an ill prepared soldier heading into battle with a rifle thinking to himself that its the saving grace that’s going to get him through even though he hasn’t thought about what’s going to happen next. The analogy sounds ridiculous with an obvious answer that “no one would be that dumb” but the fact is this is what most new traders do and inevitably they bring about a quick end to their new trading career. Futures have long been regarded as one of the riskiest investments in existence, and understandably so with close to 95% of new traders losing almost all of their original principal within a 6 month time frame. So let me ask you this: If people only lost money trading futures then why does anyone invest in them at all? Simple because the other 5% that know how the game is played are making a killing! So does this mean that the 5% are reaping the benefits from the losses of the other 95%? In partial yes, but whether or not money is made has little to do with new speculators. The just add more liquidity to the market by providing extra buyers and sellers that would otherwise not be there. This is similar to a liquid housing market loaded with plenty of buyers and sellers allowing for homes to be bought and sold without dramatic price changes. Hedgers and fundamentals consist of most of the movement in the market not new traders.
So now the question is: where are the successful traders making money? Simple: all they do differently is use back tested trading systems to execute precise trades when entering and exiting the market. Automated trading systems have grown in popularity over the last 8 years and now make up the bulk of most trading on the exchanges. But trading systems are a small part of the big picture; you still need to find one that can withstand an ever changing market and not just the current market pattern. A trading system isn’t a person, it’s not counter intuitive and it won’t recognize changing patterns in the market. For this reason it’s important to find a system that will flow with the large market moves and not fight operate to the contrary. I’ve traded many systems over the years and found that this type of system is the only one that will produce a good long-term result. This type of system uses as simple formula to tell whether a large move in one direction is likely for the day, it will then get out at the end of the day whether it was a long or short position. Futures’ trading has advantages that traditional investments don’t. Your success won’t be affected by a recession because you can take advantage of both directions the market may be moving at any given time.
What most people don’t know about futures is that you’re not actually investing in anything. A futures trading strategy just like the one I use is really just a machine designed to pull equity out of the market. There’s no term that you have to wait out to get your capital back, and your money is only tied up for as long as the trade runs. You also have the advantage of leveraging a large volume of a commodity or currency. Let me explain: When you trade your trading a large volume of a currency or commodity. Your trading account is margin, which is only a fraction of the actual value of the commodity; this acts the same way that earnest money does on a house. When you enter into a long or a short position in the market your using that margin to control the commodity and benefit from a price difference. When you exit the trade your selling back the rights to the contract. What’s nice is that unlike a house or other asset the market is liquid and is designed for you to take advantage of losses in the market as well as gains.
This is the reason why good futures traders and Commodity trading advisers tend to make high returns because your not holding onto something that takes for ever to rise in value over time, you’re simply taking advantage of prices up or down multiple times per day or per month. A good trading strategy will lose once in a while there’s no way to combat that, but if it is a good strategy it should return you 2 or 3 times what it loses on average. When viewing the long term performance of a system don’t pay so much attention to how much it gains but how consistently it gains. I would rather have a system that earns small amounts steadily than one making insane profits only to keep you up at night because it yo yo’s back and forth so much. So you can see how you’re not really investing in anything just a way of quickly extracting money from the market and pulling out again.
I recommend that if you’re beginning in futures that you start by finding a good CTA (commodity trading adviser) and have him manage your futures account. There are several CTA’s with excellent track records out there. Most CTA’s will use an automated strategy that they watch continuously through out the day. If you have a good CTA he will pay close attention to market trends and adjust the strategy for loss as conditions change. He should also ask you about your risk tolerance and adjust your trading accordingly. The CTA has only power of attorney to trade your account he doesn’t have any access to your funds. A third party clearing firm that’s connected with the brokerage house the CTA is using handles your funds. Usually you can access your funds within one business day.
So……. Trading Futures Risky or Profitable? You be the judge. Many financial advisers will tell you that Futures are risky and believe me they have every reason to think this. But if you find a good system using the common sense I just explained above you will have the best high yield investment available that will most likely outperform ten fold what any mutual fund or other asset can do and with performance that isn’t related to how good the economy is doing.
Futures: Soft Markets and Lots of Leveraging Power
Stocks are temporary loans, for all intents and purposes. You acquire a certain amount, based upon your wherewithal, and then you take possession of a certain amount of certificates entitling you to the value of your investment. When the market value of these stocks increases, you can sell your stocks for the market value, entitling you to the difference. Hence, when yours stocks “go up” you make a profit. But, when your stocks lose value, you quite clearly lose value as well.
Hard stocks, however, lead to hard losses. You may prefer the softer margins of the futures market. To begin this volatile career as a futurist, you need only pony up to the margins set by each commodity on the market. So, for instance, you like that the margin (think of margins as ante in a poker game) for wheat — or let’s say sugar. The initial investment margin for a commodity, therefore, may be $5,000 or so.
Once you have invested the initial margin amount you may begin to wheel and deal using smaller increments known as e-minis. Now, it may help you to think of this margin in term of your own home. Imagine putting down 20% of your home’s value in order to steer its potential open market value. Heady stuff, indeed. But be wary and stay focused or you will suffer the fate of many a day trader in the 1990s.
Now, thanks in part to the Online Trading Academy, let’s indulge in a borrowed example. Let us presume that a given e-mini trading price is valued at $980. The market value is computed by taking the dollar value per e-mini point ($50) and multiplying it by the last trading price. Thus, $980 multiplied by $50 equals $49,000. Now, say the initial margin value, as set by the Chicago Mercantile Exchange, is $5,625. This means for $5,625 you can determine a futures contract worth $49,000. This represents a 9:1 leverage ratio.
This tremendous leveraging power, however, comes at the cost of liquid capital. Replenishing undervalued or depleted e-minis means having instant access to cash. Your Roth IRA or trust fund will do you no good. If the market moves against your futures, you will be responsible for meeting your margins should they fall below market value. Failure to do so will handicap your ability to trade as quickly and lucratively as you might like.
