Lessons from the Pros


Futures Contracts for Those Traders Starting Out

Over the last two years, Online Trading Academy has grown exponentially as a direct result of the introduction of the three-day market timing class. With this expansion we have brought on many new students that have little or no experience in trading futures.  For somebody that doesn’t understand the futures market, initially, the first impression is that futures’ trading is “very risky”.  This can be true for any leverage asset class if the trader doesn’t practice a sound low-risk high probability strategy.

Futures can be a great vehicle for generating daily and weekly income because of the leverage (roughly ten to fifteen to one). For example, a trader can control a one hundred troy ounce contract of gold (notional value at today’s price gold of $124,000) for a deposit of $6600. The leverage gets even better for the Stock index futures contracts such as the E-mini S&P. The intraday margin is reduced to 25%of the full margin in most brokerage accounts.  This means that a trader can control over $90,000 worth of the index for a mere $1200 deposit in a futures account.  Don’t let these numbers frighten you as it’s all about entering low risk and with a high probability. If this is the case, this type of leverage should get a trader excited about the opportunities. This alongside the fact that futures trade continuously 24 hours a day five days a week also makes them  an enticing vehicle for the working professional.

As is the case with all asset classes, futures come in variety of contract sizes and volatility levels. So the question, for those starting out, is which contracts I can trade that require lower margins and are less volatile?  Keep in mind that volatility can change very quickly so a trader needs to adapt.

Since most new futures traders are somewhat familiar with the stock market a good place to start is in the stock index futures. The NASDAQ in particular is a good starting contract. The intraday margin is less a thousand dollars and it trades $5.00 per tick $20 for a whole point.  The liquidity is also very good in this contract as it trades on average of 400,000 contracts per day.

For those interested in the currencies futures, the British Pound, and Canadian dollar are also smaller, less volatile contracts that can be easier to trade for someone staring out. The BP( British pound) pays  $6.25 a tick with a margin less than $2000. The CD ( Canadian Dollar) is even lower in its margin requirements at around $1300, it pays $10.00 per tick.

In the grain markets the 5000 bushel Corn and Wheat contracts are also viable for the trader just starting out.  These both have margins around $2000 and pay $50.00 per point. The trading hours are somewhat unique so make sure you check the CMEGroup website for the trading hours, and also make it a habit to  check a commodities calendar  at the beginning of every week for upcoming reports that may impact prices.

Lastly, the interest rate market is very important in the financial markets, as its price movement can have ramifications throughout the global financial system.  The Ten -Year note contact is one of those contracts the can traded by the novice. This contract controls a notional value of $1000 worth of the 10 year US Treasury Note, and has a margin that’s  roughly $1300, it pays $15.625 per tick.

And there you have it. This is a small group of markets that I recommend for the trader learning a low-risk strategy.  And as is the case when starting any new endeavor, make sure you practice on a simulator account  initially to gain the practical application and confidence of the strategy. I hope this helps and I look forward to seeing you in the classroom or the XLT rooms.

Until next time, I hope everyone has a great week.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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