Forex for Beginners courses : Basic Training4
Part 4
Part 4
Additional Uses of the Futures Markets
This course has, to this point, briefly outlined preliminary concepts and applications of futures trading.
Naturally, as a vehicle for speculating, hedging, or spreading risk, futures trading has significant
importance. As a vehicle for stabilizing costs to producers and end-users, futures trading is a vital tool.
On a more pervasive level, however, an understanding of futures trading can prove very valuable to the
investor not interested in actually trading futures.
This course gives considerable attention to the hypothesis that a knowledge of futures price trends and
futures market behavior can assist one in understanding economic trends as well as in forecasting the
short-term to intermediate-term direction of prices. There may also be long-range implications for
investors.
Conclusions
• Futures trading is a technique whereby one can buy and/or sell a variety of raw
and processed commodity items, including financial instruments and stock
indices, for anticipated delivery at some point in the future.
• There are three major categories of participants in the futures markets, each
with their own expectations, goals and market methods.
• Futures trading allows producers and end-users to lock in costs of production,
improving economic stability as well as the stability of their particular business.
• Speculators, by far the largest category of traders, have no interest in making or
taking delivery. Rather, their interest is in playing market swings for dollar
profits.
• There are many common objections to futures trading. Some have merit, others
are not well-founded.
• There are specific methods, systems and procedures used in futures trading
designed to reduce its inherent risk, a majority of which have been time-tested.
• Futures trading involves considerable risk. However, this risk can be greatly
reduced by consistent application of various principles.
• Futures trading can be an excellent vehicle for immense profit, or it can be a
dangerous tool for financial ruin. Those who win often attribute their success to
an attitude, which reflects self-discipline, courage, consistency, persistence,
specific trading techniques and a willingness to learn from mistakes.
Dealing with Basic Issues First
The goal of profits in futures trading can be achieved through many ways -- long-term trading, short-
term trading, speculating on an intraday basis, spreading, options trading, option spreads, floor trading,
as a broker or by a combination of these strategies. In addition, there are many vehicles which can
lead you toward, or away from your goals.
How Will You Achieve Your Goal?
You must make some important decisions as to how you will achieve your goals. Some of these
decisions can be made based on your present knowledge. Others, however, cannot be made until you
have a broader understanding of the field.
I would suggest that even if you feel you already know the answers to these issues, you come back and
reread this section after you have finished reading the entire text in this course. In future sections, I
will revive some of these pressing issues, providing you with some suggestions as to their resolution.
The Vehicle
Many vehicles can take you to your goal. Some will lead you in the right direction, whereas others
will take you in the wrong direction. These vehicles are the systems and methods of futures trading.
I can’t tell you which system is best for you. All I can do is to acquaint you with the various methods
and with the guidelines for deciding which techniques are best for you.
The performance of trading systems is not static. Systems go through good times as well as bad.
Traders go through good times as well as bad. Traders and systems interact in a complex combina-
tion.
I can’t give you the ultimate answers, but I can acquaint you with the tools. I can give you the
knowledge to help you make your own decisions based upon the facts. As you read the remainder of
this course, keep your mind tuned to the issues I have just raised, looking for answers as you go.
Assuming that you have already had some experience in this area, you will recognize the answers
more easily.
The Fuel
The energy that drives the wheel of successful speculation is good old-fashioned money.
To make it, you have to have it, and to multiply it you have to use it wisely. You know the risk is
immense and that the odds are stacked against you. Your chances of making it in the competitive
world of futures trading are probably five or ten in 100, but they are reduced to zero by starting with
nothing.
Successful speculation is not a get-rich-quick scheme, a no-money-down real estate venture or a 15-
million-to-one odds lottery ticket. The facts of futures trading dictate very clearly that the more you
start with, the greater your chance of success and the less you start with, the greater your chance of
failure.
“How much is enough?” you ask.
I can give you some guidelines. Based on current conditions in the futures market, the beginner
should have sufficient capital to meet liberal marginal requirements on at least five contracts in the
futures market.
If we assume, for example, that the average margin on a futures contract is $2,500, then we are looking
at approximately $12,500 in speculative capital. I don’t think it is realistic for you to expect success if
you begin with less.
Don’t be fooled!
Some individuals will tell you that you need virtually nothing in the way of starting capital, whereas
others will tell you need much, much more. I won’t argue the fact that the more you have to start with
the better your odds of success, however, there is a limit on the downside.
Certainly you must consider the fact that you don’t want to risk everything. When someone asks me
how much he or she should risk in futures trading, I answer the question with a question. I ask, “How
much can you afford to lose?” One answer might be $10,000. I respond, “Take this slip of paper on
which I have written $10,000. Rip it into shreds. Flush it down the toilet. How do you feel?”
This small test represents a little experiment that may help you determine how much you can afford to
lose in the futures market without too serious an emotional reaction to the consequences.
Financially, the answer is different. How much can you afford to lose from this standpoint? I would
suggest that as a rule of thumb, you risk not more than 25 % of your total liquid risk capital!
Don’t Borrow Your Starting Capital
Let me caution you against a practice I have witnessed on a number of occasions during my years in
the futures market. It has become more and more common for individuals to borrow money in order to speculate in futures. Specifically, second mortgages or home equity loans are often used for this
purpose.
I recommend you do not consider this foolish behavior. There is no sound judgment in such behavior
and the results of such actions can be disastrous.
The individual not only places him or herself at financial risk, but jeopardizes his or her trading by
using funds that should not and cannot be placed at risk.
Certainly it takes no great insight to see that the trading decisions of the speculator will be based on
fear and this will seriously affect his or her judgment.
Another pitfall to avoid is the following mental trap: “I’ll put more money into my account than I
intend to lose, but the rest will draw interest and, of course, I will watch the money closely.” As
I explained, this is a rationalization based on unrealistic thinking.
Even with the best intentions, when “extra” money is in the account, chances are it will be used for
trading. Put into your account only what you can afford to lose in its entirety.
Don’t be fooled by the lure of interest rate earnings on the unused funds, especially low-risk trading
programs, fail-safe programs, “no risk” option strategies, minimal risk spreading programs and a host
of other seemingly simple “minimal risk” programs.
I’ve seen them come and I’ve seen them go. There are some big winners, but there are many, many
more big losers. Do not accept the claims of any trading system, your own or that of someone else, as
the basis for deciding how much of your money you will place at risk.
Reach Your Goal by Stages
The most fruitful and consistent means to achieve a goal is through stages or steps. Unfortunately, or
perhaps fortunately, our dimension in time and space does not permit thoughts to become actions
instantaneously and, therefore, goals must be attained slowly.
Whether you decide to trade for the short, intermediate or long term, it is advisable that you regularly
withdraw profits from your account once you have reached a certain level of successful performance.
Generally, I recommend 10 to 25% of profits be removed from every winning trade in your account.
This need not be done on a trade-by-trade basis. You can do it weekly or perhaps bimonthly, but
remember to do it!
More speculators would be successful if they approached futures trading as though it were a business.
After a period of teaming and initial cost, a business that reaches the point of profitable operation will
generate income for its operators. The profits are then taken and employed in some other fashion not
directly connected with the business itself. Some of the other profits are turned back into the business
in order to expand its base.
It is the same with futures trading. On occasion, speculators have achieved tremendous initial growth
in their accounts. Lured by greed and the promise of even greater profits, they have plowed every
penny, if not more, back into the market, only to lose it all. When all is said and done, they have
nothing to show for their great efforts.
This is why you must formulate and institute a specific program for systematically removing
a percentage of your profits from your, trading account. This rule is applicable whether you are
speculating for the long-, short- or an intermediate-term time frame.
Part 4 End
This course has, to this point, briefly outlined preliminary concepts and applications of futures trading.
Naturally, as a vehicle for speculating, hedging, or spreading risk, futures trading has significant
importance. As a vehicle for stabilizing costs to producers and end-users, futures trading is a vital tool.
On a more pervasive level, however, an understanding of futures trading can prove very valuable to the
investor not interested in actually trading futures.
This course gives considerable attention to the hypothesis that a knowledge of futures price trends and
futures market behavior can assist one in understanding economic trends as well as in forecasting the
short-term to intermediate-term direction of prices. There may also be long-range implications for
investors.
Conclusions
• Futures trading is a technique whereby one can buy and/or sell a variety of raw
and processed commodity items, including financial instruments and stock
indices, for anticipated delivery at some point in the future.
• There are three major categories of participants in the futures markets, each
with their own expectations, goals and market methods.
• Futures trading allows producers and end-users to lock in costs of production,
improving economic stability as well as the stability of their particular business.
• Speculators, by far the largest category of traders, have no interest in making or
taking delivery. Rather, their interest is in playing market swings for dollar
profits.
• There are many common objections to futures trading. Some have merit, others
are not well-founded.
• There are specific methods, systems and procedures used in futures trading
designed to reduce its inherent risk, a majority of which have been time-tested.
• Futures trading involves considerable risk. However, this risk can be greatly
reduced by consistent application of various principles.
• Futures trading can be an excellent vehicle for immense profit, or it can be a
dangerous tool for financial ruin. Those who win often attribute their success to
an attitude, which reflects self-discipline, courage, consistency, persistence,
specific trading techniques and a willingness to learn from mistakes.
Dealing with Basic Issues First
The goal of profits in futures trading can be achieved through many ways -- long-term trading, short-
term trading, speculating on an intraday basis, spreading, options trading, option spreads, floor trading,
as a broker or by a combination of these strategies. In addition, there are many vehicles which can
lead you toward, or away from your goals.
How Will You Achieve Your Goal?
You must make some important decisions as to how you will achieve your goals. Some of these
decisions can be made based on your present knowledge. Others, however, cannot be made until you
have a broader understanding of the field.
I would suggest that even if you feel you already know the answers to these issues, you come back and
reread this section after you have finished reading the entire text in this course. In future sections, I
will revive some of these pressing issues, providing you with some suggestions as to their resolution.
The Vehicle
Many vehicles can take you to your goal. Some will lead you in the right direction, whereas others
will take you in the wrong direction. These vehicles are the systems and methods of futures trading.
I can’t tell you which system is best for you. All I can do is to acquaint you with the various methods
and with the guidelines for deciding which techniques are best for you.
The performance of trading systems is not static. Systems go through good times as well as bad.
Traders go through good times as well as bad. Traders and systems interact in a complex combina-
tion.
I can’t give you the ultimate answers, but I can acquaint you with the tools. I can give you the
knowledge to help you make your own decisions based upon the facts. As you read the remainder of
this course, keep your mind tuned to the issues I have just raised, looking for answers as you go.
Assuming that you have already had some experience in this area, you will recognize the answers
more easily.
The Fuel
The energy that drives the wheel of successful speculation is good old-fashioned money.
To make it, you have to have it, and to multiply it you have to use it wisely. You know the risk is
immense and that the odds are stacked against you. Your chances of making it in the competitive
world of futures trading are probably five or ten in 100, but they are reduced to zero by starting with
nothing.
Successful speculation is not a get-rich-quick scheme, a no-money-down real estate venture or a 15-
million-to-one odds lottery ticket. The facts of futures trading dictate very clearly that the more you
start with, the greater your chance of success and the less you start with, the greater your chance of
failure.
“How much is enough?” you ask.
I can give you some guidelines. Based on current conditions in the futures market, the beginner
should have sufficient capital to meet liberal marginal requirements on at least five contracts in the
futures market.
If we assume, for example, that the average margin on a futures contract is $2,500, then we are looking
at approximately $12,500 in speculative capital. I don’t think it is realistic for you to expect success if
you begin with less.
Don’t be fooled!
Some individuals will tell you that you need virtually nothing in the way of starting capital, whereas
others will tell you need much, much more. I won’t argue the fact that the more you have to start with
the better your odds of success, however, there is a limit on the downside.
Certainly you must consider the fact that you don’t want to risk everything. When someone asks me
how much he or she should risk in futures trading, I answer the question with a question. I ask, “How
much can you afford to lose?” One answer might be $10,000. I respond, “Take this slip of paper on
which I have written $10,000. Rip it into shreds. Flush it down the toilet. How do you feel?”
This small test represents a little experiment that may help you determine how much you can afford to
lose in the futures market without too serious an emotional reaction to the consequences.
Financially, the answer is different. How much can you afford to lose from this standpoint? I would
suggest that as a rule of thumb, you risk not more than 25 % of your total liquid risk capital!
Don’t Borrow Your Starting Capital
Let me caution you against a practice I have witnessed on a number of occasions during my years in
the futures market. It has become more and more common for individuals to borrow money in order to speculate in futures. Specifically, second mortgages or home equity loans are often used for this
purpose.
I recommend you do not consider this foolish behavior. There is no sound judgment in such behavior
and the results of such actions can be disastrous.
The individual not only places him or herself at financial risk, but jeopardizes his or her trading by
using funds that should not and cannot be placed at risk.
Certainly it takes no great insight to see that the trading decisions of the speculator will be based on
fear and this will seriously affect his or her judgment.
Another pitfall to avoid is the following mental trap: “I’ll put more money into my account than I
intend to lose, but the rest will draw interest and, of course, I will watch the money closely.” As
I explained, this is a rationalization based on unrealistic thinking.
Even with the best intentions, when “extra” money is in the account, chances are it will be used for
trading. Put into your account only what you can afford to lose in its entirety.
Don’t be fooled by the lure of interest rate earnings on the unused funds, especially low-risk trading
programs, fail-safe programs, “no risk” option strategies, minimal risk spreading programs and a host
of other seemingly simple “minimal risk” programs.
I’ve seen them come and I’ve seen them go. There are some big winners, but there are many, many
more big losers. Do not accept the claims of any trading system, your own or that of someone else, as
the basis for deciding how much of your money you will place at risk.
Reach Your Goal by Stages
The most fruitful and consistent means to achieve a goal is through stages or steps. Unfortunately, or
perhaps fortunately, our dimension in time and space does not permit thoughts to become actions
instantaneously and, therefore, goals must be attained slowly.
Whether you decide to trade for the short, intermediate or long term, it is advisable that you regularly
withdraw profits from your account once you have reached a certain level of successful performance.
Generally, I recommend 10 to 25% of profits be removed from every winning trade in your account.
This need not be done on a trade-by-trade basis. You can do it weekly or perhaps bimonthly, but
remember to do it!
More speculators would be successful if they approached futures trading as though it were a business.
After a period of teaming and initial cost, a business that reaches the point of profitable operation will
generate income for its operators. The profits are then taken and employed in some other fashion not
directly connected with the business itself. Some of the other profits are turned back into the business
in order to expand its base.
It is the same with futures trading. On occasion, speculators have achieved tremendous initial growth
in their accounts. Lured by greed and the promise of even greater profits, they have plowed every
penny, if not more, back into the market, only to lose it all. When all is said and done, they have
nothing to show for their great efforts.
This is why you must formulate and institute a specific program for systematically removing
a percentage of your profits from your, trading account. This rule is applicable whether you are
speculating for the long-, short- or an intermediate-term time frame.
Part 4 End
