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Should You Invest in Futures Trading?

Aug 20, 2008
Futures trading is a different type of trading in comparison to trading stocks and bonds. When you purchase stocks and bonds you have physically bought something that you own, but that is not the case with futures. In futures trading you are speculating about whether the price of a commodity will rise or fall.

For example, let's say that you decided to speculate on hogs. If you thought that hog prices would be rising in the future you would purchase a hog futures contract. If you thought that hog prices would be falling then you would sell your hog futures contract. Whether you wanted to buy or sell, there has to be a buyer and a seller.

Investors are attracted to futures trading because it isn't terribly complicated. In traditional stock markets there are literally thousands of stocks to choose from, whereas in the futures market there are only about forty markets to speculate on.

Another reason why investors like futures trading is because it is very easy to buy or sell futures. The futures market is affected by the extreme weather conditions such as droughts, hurricanes, tornadoes, and freezes because these can affect agricultural crops. Money can be made whether prices go up or whether prices go down. Still, another reason that futures trading is viewed so positively is that commission fees are much lower than those paid in stock trading.

The most important reason that traders dabble in commodities is because there is an enormous opportunity for big gains in a short period of time. Of course, the potential for big profits exists because there is a risk for huge losses as well. No trader should ever get involved with the commodities market with the intention of getting rich quick. Those who do that usually endure huge losses. Only take risks that you construe to be acceptable losses.

You can begin trading in the commodities market with small purchases.

The smaller the trade you make, the less that you risk. You can still make profits on small trades, but it may take you quite a long time. Gains and risks are interrelated. The more that you put at risk means that there is more to be made in gains. The trouble is that you must be able to manage your risks. No one can consistently make the right calls about what to buy and sell, so at some point you will be wrong.

Never invest more money than you can afford to lose. The other way to minimize your risk is to put a stop loss order in. The stop loss will automatically kick in when it reaches your set price and then your commodities will be sold so that you can stop the loss from getting too bad.

If you think you can handle these risks, then give futures trading a try. Just make sure you have agood, time tested, trading system and the discipline to follow it. Futures trading is like any business. There are ups and downs to contend with.
About the Author
Mark Crisp is the momentum stock trader. Finding the hot stocks that are going up right now and will continue to go up in the future. Sign up for my free e-course at: http://www.stressfreetrading.com
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