Futures Trading 102: How To Start Trading Futures Responsibly

Trading futures is a popular and potentially lucrative form of investing, allowing traders to speculate on the future value of various assets, including commodities, currencies, and stock indices. We covered some important key concepts about futures basics in an earlier article, which you should definitely read before this one. As a secondary installment in this unofficial course on futures trading, I decided to put together some tips to help you get off to a good start.

Most people won’t do it this way, but most people also never make it as successful futures traders. Since we aim for better than most, this means no cutting corners on the fundamentals.

If you’ve read the previous article, and you’re ready to get started, let’s begin.

Learn the Basics, But Don’t Break the Bank!

Before diving into futures trading, it’s crucial to understand the underlying assets, contract specifications, and the mechanics of the market. Invest time in educating yourself through the many free online resources, books, and webinars.

What are the tick sizes for the futures contract you want to trade? During what time of day is that market most active? What scheduled news releases affect the market price dramatically, so you can be conscious of them before they wipe out one of your positions in a millisecond? These are things you should be fully aware of before you even place a trade. Does it cost anything to learn them? No. Will it cost you hundreds or thousands of dollars if you don’t learn them? Absolutely.

This is a step that many people overlook, or overspend on. There’s a multitude of expensive, non-revolutionary courses out there. Read this next part carefully: you do NOT need to invest thousands of dollars into your education in the form of memberships, online courses, and other products offered by allegedly successful traders. There are several ways to learn about how to do this correctly, and I recommend examining the alternatives first.

Choose a Good Futures Broker Before You Start Trading

To start trading futures, you’ll need to open an account with a futures broker. When choosing a broker, consider factors such as commission rates, trading platform features, and customer support.

I use TDAmeritrade for my charting analysis (not trading), because they offer probably the best free software out there when it comes to day trading. ThinkorSwim, their proprietary charting software, is powerful, feature-packed, and free. However, you do need a decent PC, and I hope you have one. Trying to day trade successfully with the phone app (like so many Robinhood users) just isn’t going to happen with futures, unless you have extraordinary luck. It’s simply a disadvantage to not use a large screen with multiple time frames up simultaneously, and so I recommend investing in a good, widescreen monitor for your PC, if nothing else.

Note that I said I do not use TDAmeritrade for futures trading. I did when I began, but quickly realized it was a terrible deal. Their margins are incredibly high compared to other brokers, and this is the biggest drawback, not including other potential software issues you may encounter.

TDAmeritrade provides a service to a much broader market than a futures broker would. You can easily find better commissions and margins at a futures broker instead of a large commercial broker like TDAmeritrade.

Develop a Trading Strategy

Successful futures trading requires a well-thought-out strategy that includes a clear set of rules for entering and exiting trades, as well as risk management techniques to protect your capital.

On this blog, I include many useful tips for developing your strategy. My strategy took years to put together. But it’s not that it’s incredibly complicated and requires powerful tools. It’s actually based on some very general concepts that many technical traders also employ.

The difference, however, comes down to the application. If you’ve read my articles on significant candles like the gravestone doji or bullish/bearish harami, you know a little bit about how application makes a world of difference with even simple concepts.

Start Futures Trading with a Practice/Demo Account

Perhaps the most important step, besides getting started, is the usage of the demo account. I notice most traders either completely fail at or skip this stage entirely. It’s no wonder that they struggle when it comes to live trading afterward.

Many brokers offer demo accounts that allow you to trade with virtual money in a simulated environment. This is a valuable tool for testing your trading strategy and getting familiar with the trading platform before risking real capital. But it goes a lot further than that.

Demo trading is about training your mindset and your discipline, more than achieving any sort of success. This is the point that is lost on beginner traders. I will include a more in-depth article on how to demo trade better in the future.

Adjust your Strategy as you Paper Trade

If you aren’t succeeding while paper trading, you’re definitely not going to succeed with real money. But here’s the tricky part: if you are succeeding while paper trading, it’s still not enough to succeed with real money.

This is because day trading is more about mentality than about strategy. You can have the best strategy in the world, and still end up losing money day after day, because your mental state is not in sync with the strategy you developed.

Therefore, you need to constantly adjust your approach as you paper trade and monitor live markets.

In addition, don’t be in a rush to start trading, especially when it comes to futures. It can be exciting once you paper trade successfully and see your virtual account grow. Once you start to understand the potential money in futures trading, you’ll see the temptation to put on trades constantly. Don’t let the numbers or stories of other people’s successes distract you from building a good foundation.

Start Trading…with micro-futures.

Once you’re comfortable with your trading strategy and have a solid understanding of the futures market, you can begin trading with real money. Start small and gradually increase your position size as you gain experience and confidence in your trading abilities.

It’s important to take this step as slowly as necessary. If you are feeling uncomfortable, nervous, and anxious before you even begin, it’s quite normal. But it might be a sign that you’re still too attached to the wrong ideas associated with trading.

On the first day, if you find that you are really unable to take on the risk, reduce your trading size. This may not be possible in futures, which is another reason futures trading is more difficult than trading stocks. Thankfully, micro futures exist now. Take advantage of them.

Monitor and Adjust Your Strategy, Again

Regularly review your trading performance and make adjustments to your strategy as needed. Keep learning and staying informed about market trends and news that could impact the futures contracts you’re trading.

When good traders start trading stocks with a small account, they are going through the same process as futures (or forex) traders. They start with a small position size, sometimes so small that it’s a matter of pennies gained or lost in a day. Then, they gradually add to it as they gain confidence and tweak their strategy over time. While you can’t futures trade any decent market for pennies, you need to approach it the same way.

Manage Your Risk

One of the most critical aspects of any trading is managing risk. Managing risk is a pain in the ass, sometimes, but it’s necessary. Use stop-loss orders, responsible position sizing, and of course, trade micro futures. In fact, only trade micro futures while you’re in your first 3-6 months of futures trading, barring extraordinary progress. Even then, I’d recommend not scaling up anytime sooner than that.

Protect your capital and minimize potential losses when you’re just starting out. There’s nothing wrong with taking a small loss and stopping for the day. What’s important is that you do not blow your account, because then you cannot trade again until you take care of it.

Most importantly, take care of yourself. Seriously.

As someone who’s traded extensively for several years, and been through some stressful ups and downs, I cannot understate how important it is to take care of yourself in this business. I won’t repeat all of the standard cautionary tales and stories of overnight ruin, but it’s important to stay aware that they are a reality.

This is perhaps the best tip you can get as a beginner here, something I wish I appreciated sooner in my own journey. By taking care of yourself, especially mentally, you will notice that your approach to trading will gradually become vastly different from the masses. And this is what you want.

What does it mean to take care of yourself? I am talking doing all the little things that provide a boost mentally, physically, and spiritually. You know some of them: eat well, drink plenty of water, sleep early if you have to be up early.

But the best traders often do more than this. They monitor themselves, sometimes to an unbelievable degree, in order to always be aware of themselves and their ability to perform. This means journaling, meditating, exercising, and getting creative with how you track your own performance and progress.

If you’re like me, and you want to aim for better than average, there’s no way around this fact. You have to do everything you can that will help you maintain your mental balance, so you can get to your desk in the morning (or afternoon) ready to perform. It should not matter how well or how poorly the previous day went, or how your day is going so far. This is the crucial aspect that most unsuccessful traders never truly figure out.

I am fully aware that this step is going to be disregarded by most people. But if you end up lasting more than a few years, it will surely be the most important thing you did, assuming you start now.