| Most people know the concept of buying a stock. | | | | support and resistance lines. These lines can be |
| One must choose a company, buy the stock at a | | | | drawn on a chart to show levels of price reversals. A |
| set price, wait for the stock to increase in value, and | | | | support line is used when the price is going down. At |
| sell for a profit. Some people buy stocks for investing | | | | the support line the price movement has a tendency |
| purposes. Some people buy and sell stocks multiple | | | | to reverse and go higher. The same is true with |
| times during the day for income purposes. When a | | | | resistance lines. A resistance line is used when the |
| stock is bought and the price increases by one dollar, | | | | price is going higher. At the resistance line the price |
| the profit is one dollar. What most people are | | | | has a tendency to reverse and go lower. Price |
| unfamiliar with is futures trading and the leverage | | | | patterns and support and resistance lines are only the |
| behind each trade. Futures trading can be risky but | | | | basics of technical analysis. These tools are used in |
| very rewarding if one possesses the knowledge, | | | | combination with many other indicators and |
| skills, and discipline. Even though futures trading is | | | | techniques to predict a market's direction. |
| risky, trading skills are important because one must | | | | The futures market in the past was only traded by |
| be able to manage his or her own money in an up or | | | | the professionals working in the pits of the |
| down market. | | | | exchanges. Now in the electronic age, anybody with |
| Futures are traded as contracts. What is a futures | | | | a computer can trade futures. There are many online |
| contract? According to the National Futures | | | | brokerages who offer futures trading. Most |
| Association, a futures contract is a legally binding | | | | brokerages will have either a web based trading |
| agreement to buy or sell a commodity or financial | | | | platform, a software version, or both. The possibility |
| instrument at a later date. Futures contracts are | | | | of trading is only limited to the internet. One can |
| standardized according to the quality, quantity, and | | | | trade from any location that has an internet |
| delivery time and location for each commodity. The | | | | connection. Some brokerages even have cell phone |
| only variable is price. Price is the only component that | | | | applications allowing someone to place or monitor |
| will change. All other components stay the same. | | | | trades on the go. For the serious trader who requires |
| There are two types of futures contracts. The first | | | | quick transactions, a direct access platform is |
| is physical delivery. Every futures contract has an | | | | essential. A direct access trading platform allows the |
| expiration or settlement date. On that particular date, | | | | user to place a trade directly to the market of |
| if a person owned, for example, one contract of | | | | choice. Some brokerages act as a middleman and the |
| grains, 5,000 bushels of grains would be delivered. | | | | transaction is routed through them, then to the |
| Most people would not like a huge delivery to show | | | | market. This can have a delay in the transaction. |
| up at their doorstep, so most futures brokerage | | | | The basic order types used when buying or selling |
| firms only perform a cash settlement. Cash | | | | futures contracts or any other stock are the market |
| settlement is the second type of futures contract. | | | | order, limit order, and stop loss order. A market order |
| Instead of physical delivery the person whom bought | | | | is an order to buy or sell immediately at the current |
| the contract of grains would either take a profit or a | | | | price. This order is used when it is necessary to get |
| loss at the current value. If someone bought a | | | | into a trade right away. A limit order, on the other |
| contract of grains and the price rose to a higher | | | | hand, is an order set at a specific price. If the market |
| level, upon expiration, the person would take the | | | | is at a level and an individual would like to buy or sell |
| cash value as profit. | | | | at a specific price, a limit order is used. If the S&P |
| All futures contracts have a different value and size. | | | | was trading at $820, and someone felt a good |
| One wheat contract is the equivalent of 5,000 | | | | buying opportunity was at the $800 level, a limit |
| bushels of wheat. One pork bellies contract is the | | | | order to buy would be placed at $800. If the price |
| equivalent of 40,000 pounds of pork bellies. There | | | | dropped to $800 an order would automatically be |
| are also futures contracts for the stock indices like | | | | placed. The most important order type is the stop |
| the DOW, Nasdaq, and S&P 500. The most popular | | | | loss order. A stop loss is used as protection when |
| traded contract is the S&P 500 E-Mini contract. One | | | | the market moves in the opposite direction intended. |
| contract is the equivalent of $50 times the current | | | | This order will be set at a specific price level and |
| value. So if the S&P was quoted at $800, one | | | | have a predetermined loss. If the market moves |
| contract of the S&P E-Mini would be worth $40,000 | | | | against the trade and the stop level is met, the order |
| ($800 x $50). This is called leverage. For an $800 | | | | would execute and immediately close the trade |
| investment one could have control of $40,000. If a | | | | preventing further loss. This is important, especially |
| trader was to buy one contract at $800, and the | | | | when trading futures. |
| price of the S&P happened to rise to $801, the | | | | When trading futures contracts, the potential to lose |
| difference is $1. Since the leverage is 50 times the | | | | more money than originally invested is very possible. |
| value, the profit would have been $50. The original | | | | For example, buying one contract of the S&P E-mini |
| investment of $800 was worth $40,000, so when | | | | may cost $800, but if the price would happen to fall |
| the price increased to $801, the value is now $40,050 | | | | to $780, the loss would be $1000. Using the math |
| ($801 x $50). The result is a $50 profit for a $1 | | | | previously explained, at a $20 loss multiplied by $50 is |
| change in price. The number of contracts traded is | | | | $1000. This is where risk management plays a key |
| not limited to just one. Two, three, ten, twenty, or | | | | role. It is important to place protective stops at a |
| even one hundred contracts can be bought and sold. | | | | level to reduce the risk of the trade. Normally a |
| The amount of leverage one can have is a powerful | | | | trader will risk less than he or she is trying to profit. |
| thing because with a small account size, one can | | | | For example a trader may risk $250 for a potential |
| trade a large value. | | | | $500 gain. When establishing a risk management |
| There are two basic strategies when trading. There | | | | strategy, it is important to risk less than the profit |
| is buying, also called going long, and there is selling, | | | | objective. Using this method, a trader who had |
| also called going short. A person whom thinks the | | | | winning trades 50% of the time would be profitable. |
| market will be going higher, will go long. A person | | | | It is even possible to win less than 50% and still be |
| whom thinks the market will be going lower will go | | | | profitable. For a trader to be successful, there has to |
| short. It is not necessary to buy a futures contract | | | | be a plan. There has to be a reason to get in and out |
| before it can be sold. The contracts can be sold | | | | of a market, and set profit and loss objectives. |
| before they are bought. The opposite of what most | | | | Successful traders do not take random trades. Using |
| people would think of doing. When shorting the | | | | technical analysis and other tools, a trader will only |
| market with the expectation of it going lower, it will | | | | take the high probability trades. A trade that is high |
| be required to buy the contract back before the | | | | probability is one in which may have an 80% chance |
| settlement date. When shorting, the math on profit | | | | of winning. A trade with less probability is not worth |
| and loss is the exact opposite of buying or going | | | | taking. The combination of all the risk reward aspects |
| long. If someone went short one contract of S&P | | | | and proper planning and discipline will make a good |
| E-Mini at $800, then buys it back at $799, the profit | | | | trader. |
| would be $50. This is extremely important with | | | | Futures trading can be confusing at first, but with a |
| trading. The market is not always going higher, so | | | | little study and practice, the results can be a valuable |
| going short gives one the opportunity to make | | | | thing. The economy is always changing and even |
| money when the market is going lower. When | | | | though futures trading is risky, trading skills are |
| trading, there are various reasons to either go long or | | | | important because one must be able to manage his |
| go short. Technical analysis is very popular and it is | | | | or her own money in an up or down market. |
| the study of historical chart patterns. It is said, | | | | Whether investing for long term or day trading for |
| patterns in a chart will repeat over time. Certain | | | | income, trading skills will help one build wealth over |
| patterns will have the result of a price movement | | | | the long-term. |
| either higher or lower. There are also what are called | | | | |