When a person makes the commitment to learn trading, one of the first (and most important steps) in this process is learning a method that is proven to produce results over the long term. After that, he must work hard to master it. Secondarily, a trader has to choose which asset class is best suited for what he wants to achieve. In deciding, the personality and risk profile of the individual also has to be taken into consideration.
For shorter term trading (also known as day trading) stocks are the most familiar to the general public, largely because of the media coverage they receive, and because of the popularity they achieved in the late nineties during the tech boom. Stocks can be a good trading vehicle as they provide lots of versatility because of the wide diversity of companies available to trade, and the fact that share the size can be adjusted to accommodate every risk level. The only drawback (and this can be big for some) is that trading stocks for the short-term is the most capital intensive of all the asset classes. For a pattern day trading account the minimum required balance is $25,000 and the intra-day leverage is four-to one, which means with the minimum balance you get $100,000 worth of buying power.
An alternative for those with a small trading stake would be the futures market; these derivative contracts provide many benefits such as great leverage, and depending on the contract, strong liquidity. For the general investing public, the futures market is somewhat esoteric as they really don’t understand the mechanics of how this market actually works. For one, the capital required to start an account is much smaller than for stocks. With some brokers as small as two thousand dollars. The leverage in these markets is bigger as well; with most contracts having anywhere between a ten and twenty to one ratio of money deposited for the amount of the underlying commodity being controlled. For example, a gold contract controls 100 troy ounces of the shiny metal; with the current price of gold roughly at $1300.00 it gives that contract a notional value of $130,000. A deposit of $8,800 is required to trade one contract. The performance bond (amount required for controlling one contract) varies among the various contracts depending on the size of the contract and the volatility levels of the contact.
For many new traders in the futures market the most seamless transition is to begin trading the stock index futures. This is because of their familiarity to the stock market. Lately a lot of focus is being placed on these indices, in particular the Emini S&P and Dow because of their strong recent rallies. Also included in these stock related futures contracts are the mini Nasdaq 100, and the Russell 2000 which (at the time of this writing) is at an all-time high. Stock index futures are great for day trading as they offer lower margin rates during the day trading session which is essentially when the New York Stock exchange is open for trading.
For the night owls among you, the currency futures are fabulous, as they become very active during the European trading session. These include the Euro, Yen, British pound and Australian Dollar, just to name a few.
There are also the traditional commodities markets which include gold, oil, corn, coffee and soybeans. What’s great about these markets (commodities) is that they have regular sized and mini sized contracts. These markets also tend to be trendier and would be more in the swing trading category, although they can also be traded in smaller time frames.
All in all, the futures market offers traders a wide array of opportunities to choose from with all the benefits of leverage and twenty four hour markets. It’s very important that you do your home work, and find the right market that conforms to the time of day and risk parameters that will meet your needs. One huge caveat though, do not attempt to trade any leveraged product before you learn how to generate low-risk, high probability ideas, because the price of learning these concepts on your own can be very expensive. Contact your local Online Trading Academy Center and ask about the Professional Futures Trader course.
Until next time, I hope everyone has a great week