How can I start trading futures?

  1. If you don't have $20,000+ that you can afford to lose then don't even start any research. In our opinion, that's an absolute minimum account size.

  2. Be aware that at least 70% of new futures traders get wiped out or close to it within about a year and usually less - and yes, this is really true.

  3. If you want to learn to trade futures in order to "get rich quick" or similar, don't read further - in our opinion and experience, that's virtually a guarantee you'll lose most or all your money. The primary reasons are that the goal of "get rich quick" is more of an emotional goal rather than logic based one, and emotion in futures or active trading is one of the main enemies of success. It should be approached much more as a business - we're unaware of any successful legal businesses whose owners had or have a goal of "get rich quick".

  4. Be aware that you can lose significantly more than what is in your futures account.

  5. Go to a large, regular book store and look through any books on the subject that are written by successful traders and make sense to you. The online folk like Amazon are ok, but the key is being able to read portions of the book to see if its readable and workable and understandable for you. One of our personal favorites is Larry Williams, but please do make your own decisions. (Do note that Mr. Williams has courses and a newsletter and other services available - we do not imply or intend any recommendation of any of them and we do not have any financial arrangements with him or any of his companies. We've simply found his and others viewpoints and experience helpful over the years, but also far from perfect.)

  6. Do the same thing in the areas called Technical Analysis and Fundamental Analysis if you're unfamilar with it. Be aware that every other futures trader knows both of them, and usually much better than stock or option traders do.

  7. Reviewing the free archives of Futures Magazine here can be very useful for an overall picture and "flavor" of the area.

  8. A quite workable and useful picture of current Futures Contract Specifications is available here, as of late 2005. That site also has free charts with which one can practice.

  9. Paper trade for practice, and recognize that live trading really is quite different than paper trading when its your actual money.

  10. The biggest rule in our opinion is to never make large trades. Second is to never even come close to using the maximum leverage available.

This is in no way, shape or form intended to be a full answer, nor to encourage anyone to trade futures but rather to provide a starting point for those with interest. Since we're not legally registered investment advisors, we can not go any further with specifics or advice. And yes, many of our answers here are intentionally dark and pessimistic - trading futures can be very dangerous to your financial health.

Another's view - Futures trading rules.

An example of trading a gold futures contract

For purposes of illustration *only*, let's say that gold is at $500/oz. and you don't think it will go below $400/oz. under almost any scenario.

Here's the way it works out:

First, the commission for one contract varies between $10-$100, depending on which broker one uses, so is directly and favorably comparable to stock commissions.
Second, gold futures contracts are currently (early 2006) available as far out as June 2010, so timing variables and differences are minimal when compared to mining stocks or whatever.

  1. The standard size gold futures contract is for 100 oz (although there is a mini contract with about 33 oz.)
  2. The futures contract actual value then would be $50,000 (100 x $500)
  3. The low point would mean a contract value of $40,000 (100 x $400)
  4. Minimum balance (margin) on one futures contract today is $1750 but lets round it up to $2000 for simplicity (Current margin data info here).

So, if you had $12,000 ($2,000 minimum margin plus $10,000 to account for maximum loss) in a futures account you could purchase 100 oz of gold without virtually any fear of being stopped out at a loss due to a margin call, assuming your initial $400 minimum was true.

You would be leveraged at over 4:1 (50,000 / 12,000), which is significantly higher leverage than all but a relatively few mining stocks have returned, and there is no risk based on surprises coming out of a company or companies.
In this particular example, a rough analogy could be made that one is "buying" gold at about an 76% discount (12/50). Note that this does *not* mean you can actually buy 100 oz of gold for $12,000!

Note again that we're not necessarily recommending this approach, just trying to show that the "high risk" that futures are thought to have by many is based on incomplete or just plain false data. Also, there are other factors in the due diligence area and w're not trying to teach futures in one page either.

To extend it further and show a possible outcome:

Using the entry point of $500 and an example exit (target where you sell and get out of or close the contract) of $750, the difference/profit is $250 (750-500) per ounce. Since there are 100 oz. per contract, the profit is $25,000 on the "investment" of $12,000.
Futures are not like options too - the full $12,000 continues to be yours (assuming the position is profitable of course) when the trade is exited/closed.

Transaction fees

At an average futures broker like Mann Financial, trading one contract is $35 ($15 for a day trade). At a discount broker like Interactive Brokers, trading one contract varies between $2-$10 depending on one's volume.

The fees look similar up to that point.
But where futures transaction fees pull far ahead is when one looks at the full picture. A full sized silver contract (5,000 ounce) today is worth about $65,000. A USDX contract is about $100,000. A mini S&P 500 is about $75,000 and a full sized S&P 500 contract is about $375,000.

Bottom line - they're significantly lower than stock trades overall. Trading 100 shares of a $100 stock involves a $10,000 transaction and the average fee at a discount stock broker is about $10. For the same transaction fee, futures trades average at least 5 times cheaper.

Leverage is not required

The selection of investments as of mid 2007 that allow a direct participation in, for example, agricultural commodities such as corn or wheat or soybeans are limited at best.

ETFs are likely on the way (no, we don't know when or even if) but that may take a long time and there are also commodities for which an ETF is unlikely to ever be available.

In the meantime, a direct and unleveraged position in corn via a futures contract of 10,000 bushels requires about $40,000 as of mid 2007, and there's also a mini contract of 1,000 bushels, which requires about $4,000 for an unleveraged position.

Wheat - 5000 bushels is the full size contract - $30,000 - and the mini is 1,000 bushes or about $6,000 today.

The zero sum issue and the fallacies

While it's true that futures are close to a zero sum game (there's a loser for every winner), what is missed and ignored is that it's basically an issue with no or little meaning, and stocks are also mostly a zero sum game.

Life itself and even any game like football or soccer always has winners and losers. To point at futures and say that they have a winner for every loser, while the same thing applies to football or sales contests or auto racing (in which there are many losers and only one winner) or battles between corporation for market share, as if it's something negative or awful denies the broader truth that all games have winners and losers. In other words, it's simply a statement of fact and is therefore a point without significant meaning. If football having a winner for every loser means little in the overall scheme of things, then the same must apply to the futures game.

Secondly, the zero sum issue is brought up by those with vested interests or who do not see the full and broad picture about stocks.

Stocks are 100% a zero sum game, except when companies issue or buy back their stocks, thereby increasing or decreasing the actual amount in the market. All other stock purchases and sales are from the existing supply.

Most other stock profits are zero sum and are mostly due to long term inflation. The fully inflation corrected Dow has only gone up about 3x since 1900 as shown on our long term inflation page, and the remainder is due to productivity, population and partly share dilution. Futures, via the various commodities, benefit from the same productivity and population increases and are also very largely impacted by long term inflation too. Even when dividends are added in, the Dow has gone up less than 3% per year since 1900 as of 2007 - before commissions, fees or taxes.

The proof: assume purchase of a portfolio of resource and commodity stocks at the bottom in about 2001. Assume the sale of them at or near the eventual peak. Also assume that they will eventually return to trend as they always have done throughout history. Therefore, those who purchase and hold those stocks that are sold at the peak will experience losses equivalent to the profits taken by the seller (excluding inflation effects). In other words, just like futures where there is always a loser for every winner, there is a loser for every winner in the stock market.

In stocks, them being a zero sum game is just more hidden due to many buyers and sellers for blocks of stocks, the average period of holding the stock investment being much longer, and the "conventional wisdom" of Wall St. being wrong and also self serving.

Another and more specific real world example. Let's say one was wise and bought US stock indexes in 1997 and sold then near the dot com peak in 2000. There must always be a buyer for every seller in the stock market too, so someone or many folk bought those stocks at that peak in 2000. At the bottom in 2002, those people who bought in 2000 had roughly the exact same losses as the winners who bought in 1997 and sold in 2000. Thus, stocks are basically also a zero sum game... just like futures.

One must be careful to compare apples to apples and also follow the course of a full buy & sell cycle (like the full buy & sell zero sum cycle with a futures contract), rather than making assumptions based on "conventional wisdom" or what "everybody know". As Will Rogers, the famous American philosopher/humorist is supposed to have said: "It ain’t so much the things we don’t know that get us in trouble. It’s the things we know that ain’t so."

Thirdly, to even vaguely consider that stocks are not basically a zero sum game both ignores the maxim about markets always returning to their inflation adjusted mean and also requires ignoring major facts like the Great Depression and the dot com Nasdaq bust, etc.

Lastly, futures is only 100% zero sum if one does not take into account the economic value of the producers (and commercial hedgers) participation in the futures market. They use futures to help manage the risks of the business, and any losses they experience are simply part of doing business, much like any other expense of a going business. As another example and on the gain side, futures contracts allow farmers (commercial producers) to sell their crops at higher prices than are normally available at harvest time.

Click here for a very good PDF document called "Fact and Fantasies about commodity futures" (Original source).

A good article: SECRETS OF SUCCESSFUL TRADING in Commodities and Financial Futures

Another good one just about trading in general: How Can I Learn Trading?

An example trade

First, an example of a very simple initial trading screen from within a browser (browser has been cropped away):

This is from an older system at Man Financial, who bought out Refco in 2006, and who had bought Lind Waldock some time before. In other words, it's not representative at all of state of the art. But it does have all the key elements.
From left to right, the drop downs are:

The order has been filled in here and we also show a popup with values that were used to determine the price. From here, it's simply clicking the "Create Order" button right under the "Type" drop down box and wait for confirmation from the software.

Depending on market conditions and volume, it can take anywhere between under a second to never getting filled due to the market never having touched your price (like on a Limit order). Fill times on Market orders seldom go over a minute or so on reasonably active markets like silver. On the day this was written, the total volume of July '07 silver contracts was around 18,000... in other words, very small by stock volume standards. Each contract however was worth over $65,000.

Closing or exiting a contract is a bit odd or unusual though. You simply enter an offsetting order, and in plain English that means that if your initial order was a buy, you enter a sell order for the number of contracts you bought, and in the same contract and month and year that you bought them. It is a lot cleaner & simpler in more up to date software - you just point and click at the contract(s) you bought, and enter a sell order.

A well balanced view on trading and risk and losses from a portion of an internet post by cerberus.

There have been studies done over the years that have focused on the long-term profitability of the individual, small speculator in the futures markets. The best known is probably the Blair Stewart study (Blair Stewart, An Analysis of Speculative Trading in Grain Futures, USDA Technical Bulletin 1001, October 1949, p.57). The study was restricted to results in grain futures over a 9-year period and found that 75% of speculators lost money. Another study (Thomas A. Hieronymus, Economics of Futures Trading, New York: Commodity Research Burea, 1977, pp.l 259-263) focused on the closed trades for a particular commission house for the year 1969. It found that 35% of the firm’s customers ended the year with a profit.

A book that I highly recommend (now in its third edition as of 1999) titled The Futures Game: Who Wins, Who Loses, & Why, which goes out of its way not to paint any rosy pictures, concedes after a review of the above and other studies:

“It is important to note that the dismal profitability of the small traders results in no small part from their inability to manage money intelligently. Of the four elements of money management, the two discussed in detail in Chapter 11 are probably chief culprits—the expectation of the game being played and the probability of ruin. The small traders seldom approach the expectation of the game in the spirit of fair, good, and bad bets as determined by the profitability of the event occurring, the ratio of gain to loss, and the cost of playing the game. In their desire to play a speculative game to the hilt, in which results, either good or bad, occur quickly, they do not give the probability of ruin the cool reflection it deserves, and the small speculators remain generally unconvinced that they cannot change the mathematical expectation of the game by the way they play the game.

“There are quantitative and qualitative reasons for the supremacy of one trader over another. Many of the quantitative skills, which certainly may be acquired through patience and intellectual diligence, have been the subject of much of this book. Many of the skills that must be developed, however, deal with the behavior and the reaction of the trader to ongoing events and conditions.”

The point here is the same as it is in the poker example above: there are skills applied to the trading of commodity futures that can be learned and mastered that greatly increase the probability for long-term success, especially in comparison to the average small speculator described in the above quote -- a fact that is easily missed if one just focuses on the probability of success for your average, random, small speculator. There is a vast difference between a trader who treats trading like a business versus your average trader who, for all their lack of preparation, insight and skill, might as well just take their money and go put it all on black at the nearest casino.

How we trade

Keeping in mind that any attempt to summarize our trading style and years of experience will always be incomplete, we've had requests to put something more specific here in addition to the data in the general hat. Many books have been written in this area and the best overall recommendation we've heard is not to blindly follow some advisor or friend or hot tip, but to make up your own mind on what and when to buy. It's the only effective way to become successful in our opinion.
  • Identify the trend in 'flation and the economy, select the investment area and the direction per the hat basics.

  • Consult our own forecasts and other indicators like what the central banks are doing to confirm the timing and direction.

  • Look at the price charts of the investment and estimate support and resistance, with all the data we have.

  • Determine if the trade has at least a 3:1 but preferably a 5:1 ratio of possible profit to possible loss. If it doesn't, don't do it... period.

  • Establish guidelines for the trade in writing, including why we're trading and the level of a mental stop loss, etc.

  • We write down everything we think might help in case things go wrong, since that is where we learned what mistakes not to make and what actually does work for us.

  • With technical analysis tools like the ones noted here, start looking for a low point for a buy or a high point for a sell.

  • For futures, we use real time charts of 1-60 minute duration and for longer term trades use daily, weekly and monthly charts.

  • NEVER buy when RSI is above 35-40 or MACD is above zero in average markets, and ensure a trend line has been broken. Use all the tools in order to move the odds to our favor.

  • Once in the trade, watch it for trend violations and violations of the underlying reasoning of why we opened the position.

  • Trading can be quite emotional and having the original reasons and logic in writing allows us to review it when something unexpected happens and to judge whether we should exit... in an unemotional way.

  • If the trend is violated significantly or if the mental stop is hit - get out, regardless.

  • Otherwise, hold on until the target price is hit or close to it. Continue using the technical analysis tools and take the profit when the trend changes.

  • If an open trade causes enough concern or worry to affect our sleep... exit or lessen the size of the trade - regardless.

  • Be aware of manias or excessive valuations and know that they can turn very fast. This is also known as "don't fall in love with your investment" - markets do go both ways.

  • We also sometimes use a rule of thirds. Once the trade is definitely profitable, we'll take profit on 1/3 of the position on the first trend break and take a second third when we think the trend has actually peaked. When the trend has been confirmed to have broken, we'll take profits on the final third.

  • Continue to study the fields of technical analysis and market sentiment. Tools start and stop working and fall in and out of favor, and new ones are invented.

  • To quote market observer Ray DeVoe: "Good judgment comes from experience, but experience comes from bad judgment."

  • Yes, it can be quite a lot of work!

Note: most of the trades we do are in the futures markets. We feel that via the use of relatively low leverage that they provide the simplest (and least subject to manipulation) way to benefit from trends and signals, but in no way recommend futures to anyone due to their inherent high risk.

We're not generally big fans of stocks, but would suggest investigation via a good bookstore of the area of ETFs (like the SPY which tracks the S&P 500) or options (like the QQQQ which tracks the NASDAQ 100) as a less risky alternative to futures. Make sure to read our disclaimer below too. We're not investment advisors!

Possibly helpful links, seasonals

Commodity seasonals (external site)

Gold seasonals - chart
Silver seasonals - chart
Oil seasonals - chart 1
Oil seasonals - chart 2
Natural gas seasonals - chart
Dollar (USDX) seasonals - chart

Dow & S&P500 seasonals - chart
HUI seasonals - chart
XAU seasonals - chart
BGMI seasonals - chart

A Guide to the Language of the Futures Industry