To most new investors, trading futures sounds complicated and intimidating. But it’s actually much simpler than most people realize. On top of that, futures training is a more dynamic and exciting way to invest.
There are some drawbacks, of course. Heightened volatility and the potential backfiring of financial leverage could put an amateur investor into a difficult financial position.
So is it worth it? Should amateur investors try trading futures?
What Are Futures?
In case you’re not familiar, trading futures refers to buying and selling futures contracts. Similar to options, futures contracts are a pledge to buy or sell a specific amount of a specific asset at a specific point in the future. Unlike options, which can expire, futures contracts require a buyer and seller to fulfill their obligations at the close of the contract.
This framework is designed to help people speculate about the future price of a given asset. If you believe an asset is about to skyrocket, you might convert that speculation into a bet that allows you to purchase the asset for a relatively low price in the future.
You can trade futures contracts for a wide variety of different asset types, including commodities. Trading crypto futures is also possible, opening the door to cryptocurrency enthusiasts and forcing them to consider layers of new trading strategies.
Advantages of Futures
Why should a new investor consider futures trading?
- Speculative possibilities. If you have a prediction that a specific asset or currency is going to skyrocket or plunge in value, you can finally monetize that speculation. If your bet is correct, you could win big.
- Hedging options. Trading futures can also function as a way of hedging your bets and minimizing the potential for loss. If you make a big investment into a specific asset, you can also trade a futures contract that allows you to buy more of that asset at a different price in the future. It’s a convenient way to balance your portfolio.
- Financial leverage. Futures contracts allow you to take advantage of financial leverage, which means your potential gains are even bigger. Because a futures contract is simply a pledge to buy or sell assets in the future, you can (sort of) invest with money you don’t currently have.
- Strategic flexibility. You can trade futures of almost anything and you can shape your contracts in many different ways. Accordingly, futures trading has an incredible amount of strategic flexibility, making it a good potential fit for any portfolio.
Disadvantages of Futures
There are some disadvantages you should know about as well:
- The drawbacks of financial leverage. Financial leverage gives you bigger potential wins, but it also gives you bigger potential losses. If you place a bad bet and face a margin call, it could hurt you.
- Counterintuitive trading. Futures have additional layers of complexity that set them apart from stocks and other assets. Even if you have some experience trading stocks or similar assets, there’s a bit of a learning curve you’ll need to contend with.
- Demand for specialized knowledge. Successful futures traders tend to be people with specialized knowledge in the area they’re trading. If you try to trade Bitcoin futures without really understanding the fundamentals of Bitcoin, it could work against you.
How to Mitigate Risk in Futures Trading
If you want to mitigate the risks of futures trading, these are some of the best ways to do it:
- Study first. Before you trade any futures contracts, you should study the basics of futures trading – as well as the fundamentals of the commodity, currency, or asset you’re interested in. The more knowledge you have, the less likely you’ll be to make a foolish or uninformed decision.
- Start small. Don’t convert your entire portfolio to a futures trading platform. Instead, start small, with a minimal amount of money you wouldn’t worry about losing.
- Stick to a consistent strategy. For the most part, you should create an objective strategy and stick to it consistently. Don’t allow your emotions to manipulate your actions.
- Don’t bet more than you can afford to lose. Finally, remember that trading futures contracts is a sophisticated way of placing a speculative bet. Just like in the gambling world, you shouldn’t ever bet more than you can afford to lose.
The Bottom Line
So what’s the bottom line here? Should amateur investors be trading futures?
Futures are more complicated and, in some ways, riskier than trading other types of assets. But that doesn’t mean they’re inaccessible or that newcomers should stay away from them. It simply means you need to do your due diligence, go in with proactive knowledge of the potential risks and rewards, and employ strategies that provide some measure of protection to your portfolio.