Here's The Key To Trading Futures
Chris Vermeulen | Dec 30, 2013 12:50PM ET
Before you start implementing a futures trading strategy, it’s important that you make sure the strategies you select will add diversification (reduce portfolio volatility in some way). Having the right type of portfolio for your trading is just as important as picking the system. If you are designing a system from scratch, then taking into account what you trade is vital.
Liquidity
The first thing you should look at for any product is liquidity. If you trade in illiquid commodities, then you will find that your average slippage cost for every trade you undertake will be higher than average. And slippage can turn profitable trades into losing or breakeven trades at best in some cases. This is why my futures trading strategies are based on liquid investments like the E-Mini SP500 contracts.
The next factor that you need to consider in any futures-trading strategy are the commissions it will generate. Is it a high-frequency trading system with trades every day or a low frequency with only a few trades a month? These will be your fixed costs.
Volatility
Next, you want to concentrate on the volatility of your trading instrument. You need to adjust your trading size depending on the fluctuation of the underlying investment and be comfortable with the day to day price fluctuations in the market and within your portfolio. Volatility should be considered a factor in the size of your position.
Diversity
The final point to consider, though, is the correlation between each contract in your portfolio and how they correspond to your other contracts. Getting involved in too many similar investments generally does not work out well in the long run. So try and diversify your futures trading strategies so that when one investment is rising another should be trading sideways or possibly be pulling back.
Trading with any futures-trading system does carry risk, of course. It is up to you, when you are creating or subscribing to a system to try and maximize the potential of everything mentioned above. These are the main criteria that will affect your success or failure.
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Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
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