There’s no doubt that futures trading is inherently a risky business. Anyone who tells you it is 100% risk free is either ignorant or trying to sell you something. The truth is, it is a gamble. There’s no telling when you are going to win or when you are going to lose. The best strategy is to play this game based on the cards you have and hope for the best.
Futures trading does have huge rewards if you win and that’s probably the reason many people are attracted to it. However the chances of you losing big is just as great if not greater particularly if you are new.
I outline the 4 main risks when trading in futures. You might want to read further before deciding whether futures trading is suitable for you.
1. Speculative Business
Futures Trading is speculative in nature. No matter what the experts tell you or predict, it is not always 100% accurate. Take it with a pitch of salt. The best investment strategy is not to put all your eggs in one basket, divesting your investment among different financial instruments.
Futures Trading requires a large capital outlay at the beginning which is expendable. Therefore it is definitely not for the faint of heart. If you are thinking of making money in futures trading to pay your bills, then my advise is don’t. You should not use money to pay your bills/loans/grocery to dabble in futures trading. Only use money you can afford to expend.
Ideally, a person who wants to play in futures trading should have at least $10,000 USD in his/her personal trading account.
3. Technical Knowledge
Futures Trading requires an intimate knowledge of financial instruments. At the very least, you should be knowledgeable in the 4 main investments categories namely, income, growth, speculation and inflation hedges. Without adequate knowledge, it will restrict you to where you can invest on the market and lose potential revenue on a particular sector of the financial market.
You might be thinking I can always rely on my broker for advice. While it’s good to seek the advice of someone knowledgeable, you should be able to make intelligent decisions on your own and the only way to do that is if you have sufficient knowledge.
4. Only Invest What You Can Lose
I would not advise someone new to trading to dabble in futures simply because of the risks involved.
You should have a balanced portfolio with only a certain percentage invested in futures. My advise is about 10% but that depends on your financial standing and your investment strategy. In general, only use money that you can afford to lose.
The 4 main risks I outlined above is not meant to discourage you from futures trading. What I want to make clear is you fully understand the risks involved and also what you need to do to better your chances at winning.