Learn to Trade Futures from the Pros

12/02/2007 12:00 am EST


Danielle Dycus

Director, Sales and Marketing, CME Group

Danielle Dycus, director, sales and marketing, CME Group, hosted an expert panel that  discussed the advantages and potential pitfalls to becoming a successful futures trader.

Watch the complete workshop here...

Moderator Danielle Dycus began by commenting on the rapid growth of the futures industry. She added that with the merger of the Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange (CME), the CME is now one of the largest futures exchanges in the world, with almost-24-hour daily access.

She directed her first question to John Carter, president, Trade the Markets, Inc., asking him "Why should you trade this market?"

John replied that his number-one reason for trading futures is to achieve a better quality of life. He remarked that when he traded individual stocks, the nightly research was very time-consuming. Now he can easily follow as many as 20 different futures markets in that same period of time-or less. Additionally, with futures, you don't have to worry about corrupt or inept management, as you may with investing in equities. And lastly, the easy use of leverage in the futures markets is very attractive. However, John warned that traders must be wary of using too much leverage. He advocated the use of a disciplined system, and making sure your accounts are not underfunded.
Nick Collison, founder and CEO Saxon Financials, Ltd. commented that when he began as a trader with no experience, he found the futures markets attractive because they are simple to understand and are driven by liquidity and connectivity.

Mark Greenaway, head of Sucden Private Client Services, Sucden (UK) Limited agreed, and cautioned traders that it is imperative to quantify your risk, use stop losses, and look at your downside. He suggested that traders have a system, learn about your targeted markets, and then practice paper trading-before you place your first trade.

John Person, president, NationalFutures.com, told attendees that the advances in technical analysis have made trading futures much more attractive for individual retail traders than trading equities. But he reiterated that leverage can be a two-edged sword and that traders should employ technical tools to discover price and value. He noted that investors who learn how to capture liquidity and manage risk will appreciate the integrity of the regulated futures industry.
Dycus then asked the panel to tell traders how to get started.

Carter suggested that traders start small, wait until they blow up your accounts, then consider what they need to be successful. Instead of going into a trade thinking about how much money you are going to make, do the opposite of what most people are doing, and look at how much risk you can take and how much money you can lose. If you assume the trade won't work, the upside will end up taking care of itself.

He noted that in the Forex markets, brokers use computers to analyze their customers' accounts. And when they start placing market orders and increasing the frequency of their trades, the brokers begin taking the opposite side because they know the customers' accounts will start going to zero.

Collison agreed that traders should focus on the risk side of the trade, but added that they should also consider the time period and what kind of trade suits their personality. He said he tries to instill realism into his traders. Almost everyone thinks this is a get-rich-quick scheme, but trading is a business with a huge educational period. It can take a couple of years to find your ground and find out where you fit in. You should have a certain amount of money that you are not afraid to lose, then start slowly.

An attendee asked what you should do if you're convinced the market is going one way and it goes the opposite. Person said it comes down to focusing on risk. He suggested that you may be emphasizing one trade too much, and recommended that you may want to focus on blocks of 25 trades. Then ask yourself if you followed your rules. One strategy that successful traders often use is focusing on the trades that have the highest probability of winning. Those with 100-point stops and one-point profit generally work 99% of the time. Person noted that a trader can have a 40% success rate and still make money as long as his losses are contained.

Another questioner asked what is a realistic amount to get started. Greenaway responded that ?5,000 ($10,000) would do. Person commented that you must consider leverage as well as your maximum expectation from the trade. You need to understand the volatility of the market, what's driving it, what you are trading, and the total value of your contract. He added that what you start with is relative to what you are trading and what risk you are willing to take on that trade.

Collison commented that it's also important to get used to the fact of losing; it's part of the industry. Although losing has a very bad connotation, you must get conditioned to that psychological barrier, then recap why you got into the trade and why you got out of it.

Dycus asked panelists which educational tools would help them get started in the futures markets.

Collison mentioned the availability of a variety of good trading books. He suggested traders keep a daily journal to test out theories, and see if they spotted how to get into and out of a trade early.

Carter recommended several books: Reminisces of a Stock Operator and Trading in the Zone, as well as Person's books on pivot analysis. He suggested looking at a lot of books, a variety of Web sites,; market recaps, and newsletters; and then taking the best  information from each.

But he noted that the best way to learn is from other traders. He also recommended setting up a demo account to practice with. And lastly, he cautioned traders about information overkill, saying that generally the most successful traders he has known often use the simplest tools, often just one time period and one-to-two indicators.

Person concluded by warning traders that rules are made to be broken and that nothing works the same way all the time. To be successful, you will have to make adjustments along the way.

Carter reiterated that it is imperative that you know yourself-understand your personality, risk tolerance, and emotions. Collison said the most important elements are education, a plan, and discipline about the plan.

Greenaway added that controlling your risk and protecting your capital are paramount to being a successful trader. Person wrapped up the panel by telling traders that individual traders are making their mark. They have paved the way in the futures markets, resulting in opening doors for a lot of good traders in many countries.

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