If the stock market has been unnerving you lately, with its successive crashes and high-speed traders, then you may be looking for somewhere else to put money. Some brokers are pushing investors to jump into an alternative to stocks: futures.
For day traders or people looking to diversify or invest in commodities, it's an intriguing pitch. For years futures have been a mystery to many people, with trading relegated to pros with connections to trading floors in Chicago and New York. Futures were also associated with old-fashioned commodities, like corn and pork bellies, and considered a backwater when compared to the more prominent world of stocks.
Now discount brokers in search of new revenue sources are driving futures trading to the mainstream. This fall TD Ameritrade, the biggest retail broker by volume, has been rolling out futures to all its customers, the first major online broker to launch futures trading and to join specialists like Rosenthal Collins and Lind Waldock. TD Ameritrade's site is pitching futures as a way to diversify. Steven Quirk, a senior vice president there, says the company is driving futures into the mainstream the way it did earlier with options trading, which now constitutes one-quarter of its trade mix.
In Pictrues: 10 Things To Know Before Trading Futures
"They want to trade everything the big boys and big girls are trading," he says of his customers.
Before you jump onto the futures bandwagon, take heed. You might be a fine stock trader, but futures can be riskier and an excellent way to lose money fast. If you're thinking about forging ahead anyway, here are some tips culled from longtime futures traders, brokers and educators.
1. Don't mistake this for investing. With stocks and mutual funds, you can buy and hold for years until you're ready to sell. That's investing for the future. Futures are more about short-term trading, or speculating. When you buy a futures contract, you're buying a financial instrument with an expiration date and whose short-term losses could force you to sell. There are ways to trade futures for the long term, but more likely you will trade with an eye on the clock, hoping to make a few bucks in the next few minutes, days or weeks.
2. Beware of leverage. Just like a lever helps you lift a heavy object, in the futures market you can use a small amount of money to control a far larger amount. That's leverage. It means you can start with $5,000 and turn it into $50,000. But it also means you can start with $5,000 and turn it into a $50,000 loss. You can lose money trading stocks on margin, too, of course. But futures are generally more levered, so you can lose more in futures.
3. Only trade money you can afford to lose. The beauty of futures trading is that you can start with a few thousand dollars and use leverage to turn it into more. But a reputable broker will ask you for at least $5,000 to start, and maybe a as much as $10,000. Be prepared to lose all of it. If you can't afford to lose it, don't trade it.
4. Ignore lofty promises. It's easy to find pitchmen online saying you'll be able to support yourself by trading futures. A quick Google search turns up a site pitching "proven methods" that will "work for anyone." It's not true. Futures is a regulated business, but it still touts taking advantage of suckers. Don't do business with anyone who says it's easy.
In Pictrues: 10 Things To Know Before Trading Futures
5. Educate yourself. In the 1980s people who wanted to learn to trade futures came to Chicago, where professional futures traders worked on trading floors. Going to Chicago to trade futures was like going to Hollywood to break into acting, and you could learn from the experienced traders there.
That's no longer necessary. With electronic trading, it's easier to access information from anywhere. "The advantage online is you don't have to wait for a class," says DeBorah Lenchard, who directed a series of classes at the Chicago Mercantile Exchange, now CME Group, for 20 years. Now you can go to the exchange's website at cmegroup.com/education/. Just make sure that if you're online, you're getting information from a reputable source.
6. Have a trading strategy. Do you plan to day-trade? Do you plan to spread trade, by buying one contract and selling another? Have a plan because even longtime traders have had a rough time competing with large companies, money managers and sophisticated, high-speed trading firms.
"There are no minor leagues in the futures market. You're playing against the best people in the game, the minute you make a trade," says Bill Henner, a third-generation futures trader and educator at Value Zone Trading.
7. Fantasy trade. Almost every reputable broker offers a simulated trading program for new traders. It's a good idea to try out those programs to practice trading. Take the time to test out a trading strategy. If you do well, however, don't get co*cky and expect to do as well when you put real money on the line. While it's important to practice, it's just practice. Real trading is different because when real money is involved, your brain knows it, and your emotions and decision-making processes change.
8. Futures are a job, not a hobby. There are people who have traded futures part time and managed to turn a few thousand dollars into $1 million. Most, in all likelihood, have had the opposite sort of experience. But don't expect to make money in a few minutes per day. "To succeed it must be the No. 1 priority in your life, and you must be thinking about it all the time. I guarantee you, your competition is," says Buck Haworth, a former futures trader who now runs Born Capital, a technology firm.
9. Learn to take a loss. Futures traders trade many tips, but the one they repeat most often is to admit when you're wrong. When trading, you will lose money. The goal is simply to make more winning trades than losing ones. So don't be stubborn and fall in love with a trade or it could turn into a very costly mistake.
10. Keep learning. The market is constantly changing. No strategy works forever. You have to evolve, too, and continue educating yourself. If you truly want to trade futures, you have to commit to it.
