With the recent market volatility, there has been a rash of articles and ads hyping futures trading. The question is, is it right for you.
There are several questions that you need to consider before deciding if trading futures might work for you. It is the intent of this article to go over several of these issues.
1. Savings And Conservative Money - Before you start any investment strategy, you must have a certain amount in a savings or money in a money market account. This amount of money needs to be up and above your investment money. As a general rule, you should have at least 6 to 8 months of your average monthly expenses in that account.The reason for having this emergency account is so you can pay for unexpected events in your life without having to take money out of your investment account. This allows you to also trade without fear of using money that you "might" need in the near future.
2. Trading Capital - There has been much written about the amount of trading capital one needs to trade futures. Some consideration should be given to what investment vehicle you are planning on trading. There are different margin requirements (the amount of money a brokerage firm requires you to have in your account to trade 1 contact) for different futures contracts. This article is going to focus on the Russell 2000 e-mini futures contract. Most brokers require a minimum margin requirement is around $3,500 for 1 contract. Obviously, the more money you have in your account, the better. There are many market commentators that recommend at least $5,000 for 1 contract. There are some brokers that require substantially less to trade 1 contract (like $500). Unless you have been trading for a while, you probably need to wait until you have a bit more capital to trade.
3. Finding The Right Trading System - After you have come up with your trading capital, the next part of deciding if trading futures is right for you is to find the right trading system to fit your style and personality. There are some traders who like to trade often (several times a day). Others like to trade maybe only once or twice a day. it doesn't matter to me but it should make a big difference to you. For most traders, if you are in a trade that is up 3 or 4 points ($300 or $400 on the Russell) and then down 3 or 4 points on the same trade before going back up. There are some trading web sites that say that if you are up 2 points on any trade, you shouldn't ever take a loss in that trade. Again, that is a choice you have to make, but one that you need to consider before you begin to day trade.
4. To Pay Or Not To Pay - There are a lot of gurus out there selling there particular spin on how to make money trading futures or forex or stock or whatever. Most of these guys have systems that are usually pretty complex. The bottom line is that you have to understand that there is still a lot of personal interpretation on how to implement that system. Sites that don't charge for their information tend to have excellent strategies. Sites like Woodies CCI Club and Trading Naked are very good sources for the new day trader.
5. To Demo Or Not Demo, That Is The Question? - For the new trader, this is obvious. The answer is YES. There are some people who think that a demo account is a "crutch" and that you should cut your teeth using real money. A demo account allows you to trade as if you were trading real money, using stops, limit orders, market orders, etc, without risking any of your money. That way you can "test" any of the strategies that you come across, watch how you various trades play out after you enter them. At some point, you need to switch to a real platform and trade with real money. There is question that it is easier to take trades when there is no pain for the responsibility for taking a trade, but the demo phase of a trader's learning curve is very valuable.
I hope that the information in this article helps you to determine if day trading is right for you.
Regards,
Ron Lewis