Numerous enthusiasts perceive futures trading as a perplexing game of probability surrounded by multiple myths. However, when financial forecasting appears true to life, futures tend to be even more transparent and profitable than other trading types.
For newbies, this trading type might sound complex and risky, partly due to the use of borrowed funds. Nonetheless, anyone can master futures trading through proper training. This article aims to help you understand the realm of futures trading and debunk the myths associated with it.
Futures Trading in Brief
Before getting familiarized with prevalent prejudices about futures trading, let’s discuss the concept of futures in the first place. In simple terms, a futures contract is a consensus for the provision of cryptocurrency to the buyer at a predetermined price, in a precise volume, and at a selected time.
When entering a contract, both parties agree on the cost of the underlying asset. If the transaction is postponed, it still must be completed at the agreed time. It is worth mentioning that futures contracts are utilized not only in the cryptocurrency market but also in such versatile markets as funds, bonds, and currencies.
Futures: Beyond the Notion of Commodities
A renowned fact is that commodities make up a big chunk of the futures trading, but it’s not just hogs, corn, and soybeans. It is conceivable to trade futures on individual stocks, ETFs, bonds, or even Bitcoin.
Some Forex exchange dealers give preference to futures since they can take on significant positions (invested amount) while only putting up a comparatively small amount of money. It is convenient since you never pay the full price upfront.
Debunking Common Myths
There is a disheartening tendency to avoid trading commodity futures as a consequence of common misconceptions widespread among the public and even within certain financial circles. These long-standing myths date back many decades and were likely fabricated to mess up traders’ minds, especially those who find the futures market too complex.
You may hear a lot of conjecture like “futures are too volatile.” Ill-fated traders looking for a justification may claim that “no one can make money trading futures.” In reality, individuals do pay dividends trading them, and many top-notch traders look into the matter.
Here are a few myths and misconceptions about futures trading:
- “The futures market is too leveraged.”
While leverage is an integral part of trading, it is frequently misinterpreted. Unlike stocks, which require a 50% margin, a commodity futures contract requires only 3 to 15 percent of the total value. Many newcomers aren’t well-prepared for the responsibility that comes with such skyrocketing leverage.
On the contrary, futures as an asset class are no more volatile than stocks if approached with caution. It is advised to trade one or two futures contracts at a time to eliminate a paramount leverage factor.
- “You are obliged to take care of the delivery.”
Some believe they should be prepared to take actual delivery of the commodities involved. This is something you don’t have to be concerned about as an individual investor. We should emphasize that solely commercial entities are immersed in the delivery of commodities and raw materials in the framework of a futures contract.
As long as you close your futures contract before the initial notice day, which is a few weeks before the contract expires, you don’t have to exert yourself too much. Otherwise, you will be reminded by your broker.
- “I am short of cash to trade.”
Many individuals avoid trading futures because they claim it requires a significant initial investment. After all, commodity brokers let you sign an account with as little as $2,000.
You are advised to create risk capital that you can afford to lose, since futures can be a perilous investment. The trouble with small-scale accounts is a lot of obstacles in proportion to the account size.
- “Nobody makes a profit.”
Yes, some traders are doomed to lose money. Many of these losses come from poorly prepared traders who spring into the commodities markets untrained and go bankrupt within six months. Others may become addicted to trading, desperately trying to apply the same outdated strategies despite ongoing losses.
The good news is that investing in commodities is an all-or-nothing game, meaning that for every dollar lost, someone else wins the game. Who tends to profit? Generally, the winners are skillful futures traders and fund managers who consistently make a profit year after year. They thrive with their rigorous discipline that a vast majority of frustrated traders never adopt.
The Bottom Line
Futures trading can be a legitimate and profitable venture when approached wisely. By breaking down the myths and focusing on disciplined trading practices, individuals can navigate the futures market victoriously.
