Futures Trading Guide

Risks Involved in Futures Trading

Futures trading is a risky business and anybody who will tell you otherwise, that it is 100% risk-free, is daft or is trying to sell you something. The fact of the matter is, futures trading is a financial gamble. And, like a gamble, you will never know when you will win and when you will lose. The key is simply to play the game based on the cards you are dealt with and hope for the best.

A lot of traders are lured into futures trading because of the great rewards it can potentially bring. However, you must keep in mind the rule of opposites, in that with great rewards, also come great downfalls. Futures trading, because you're gambling with something that is yet to happen, is nowhere near accurate.

There are basically four main risks associated with futures trading. We will discuss each of them in brief here. If you want to know more, it is suggested that you consult an expert on the matter, because how the futures trading works and pitfalls involved cannot be simply summed up in a short article.

1. It is speculative.

By this, it is meant that no matter what experts say or predict will happen to the market months or years from now, nobody will be able to make perfect forecasts. Therefore, if you're planning to invest your hard-earned money into financial trades, do not put all your eggs in one basket.

While it is possible that you will make a fortune out of this risk, it is also likely that it will be the one that will send you to the poorhouse. Tread carefully.

2. To be able to trade in your personal account, you must have pure risk capital of at least USD10,000.

Yes, futures trading involves a lot of money at the onset and is definitely not for the faint of heart and the weak pocketed. Thus, if you are looking to earn sums of money in futures trading in order to be able to pay your piling bills, then you could be in for a major financial crisis. Ideally, any person who wants to enter futures trading should have a net worth of around USD100,000 before he decides to take the plunge.

3. It requires ample know-how.

Note that futures trading involves 4 investment categories: namely, speculation, growth, inflation hedges and income. Without adequate knowledge of these four, you won't be able to move freely in the trading market and might even cause yourself to lose.

Do not simply rely on somebody else to do the research and understanding for you. Being able to make intelligent decisions, no matter how inaccurate, will sometimes make the difference between a win and a loss.

4. Do not put in more than 10% of your net on futures.

This backs item number two. Indeed, futures trading should not be your first foray into financial trading. You should only do it when you're confident that you have enough knowledge and that your other investments are working out for you.

Again, futures trading exists in a very high-risk environment and it is not advisable that you splurge, no matter how attractive the possible returns are.

The above is not meant to discourage you from engaging in futures trading. What it seeks to achieve is clarity on your part, so that you won't merely dive in without knowing what risks it entails. Again, banking on futures is a huge gamble. Thus, you must do it only when you're sure you're ready.

Good luck!