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Trading for Beginners: The Step-by-Step Guide to Futures Trading

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For the beginner traders who want to try their hands in futures trading, getting started may seem daunting. But it is actually easy to get started if you know how. These nine steps will help you get a start in futures trading and reap the rewards of a successful trading.

Gain knowledge in futures trading

Step 1: Gain knowledge in futures trading

As the saying goes, knowledge is power. Before you even think of starting to trade in futures market, you must know something (if not a lot) about futures trading. A lot of traders have lost money because they failed to understand the basics of futures trading.

The most important for a beginner trader is to clearly understand the concept of leverage as well as the risk that will result from any given change in the futures price of the particular futures contract you would be trading. If you cannot afford the risk or are uncomfortable taking risk then it is best not to delve in futures trading as it is not for everyone.

Step 2: Develop a trading plan

It is crucial for you to develop a trading plan before entering the market. It is a blueprint that helps you make a clear decision without involving any emotions especially when money is on the line. Your trading plan should be based on careful analysis of the markets you intend to trade and should include at least the following:

  • Trade entry
  • Initial risk or stop loss point
  • Criteria for stop loss movement
  • Criteria for profitable trade exit

Step 3: Start with paper trading

Once you have developed a trading plan, put it to the test by doing paper trading. Paper trading is done by replicating real-world trades, either by yourself or using electronic trading simulator, until you are comfortable enough to actually enter the market and begin trading. It is a good way to become familiar with price quotations, market terminology and the general behaviour of a particular market without putting any of your money at risk.

Step 4: Choose the right contracts

When you are ready to enter the market and begin trading, the next step is picking the right contracts. There are many futures contracts to choose from but which ones are right for you? These are the 4 criteria you need to bear in mind when choosing a market to trade:

  • Volatility
  • Liquidity
  • Contract size
  • Performance bonds

Select the right broker

Step 5: Select the right broker

To start placing your first trade, you need to open a trading account with a registered futures broker, who will maintain your account and guarantee your trades. It is best to get a knowledgeable broker that can help your long-term success in trading. It is also important to check the background of any potential broker or firm with Securities Commission Malaysia as only licensed brokers are authorised to provide brokerage services.

Step 6: Determine the right size for your trading account

Take the time to study the markets you intend to trade. Understand the value of the contract and the financial impact of any strategy you use. Make sure you are able to meet the performance bond requirements you may encounter during normal market conditions. Capitalize your account with enough money you can afford to lose so you only risk a small portion on any one trade. This way, you are able to focus on the process of trading rather than worrying about the balance of your account.

Step 7: Stick to your trading plan

Remember the trading plan that you have developed in Step 2? This is the time to stick to your trading plan no matter what happens. A successful trader understands that sticking to a good trading plan is crucial in order to have a profitable trading. For example, when the market moves against a trader and passes through a previously established exit point, a good trader will exit the trade and accept the loss.

Step 8: Diversify

When you are just getting started, it is prudent to take smaller positions, involving several trades or contracts. Depending on the markets and the approach, you may have a difficult time applying your strategy while monitoring a large number of positions. Therefore it is important to remove as many distractions as possible.

Step 9: Know your position

Lastly, always keep track of your positions. Keep a trading journal and record all your transactions. Don’t forget to backup all of your online trading transactions as well. Many brokers will assist you in viewing the transactions that appear on your statement. However, it is your responsibility to know your position.

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Wan Zuraiha Wan Zakaria is a staff writer at Oriental Pacific Futures (OPF) where she writes on investment and trading. OPF is a futures and options broker based in Kuala Lumpur, Malaysia and provides electronic trading, brokerage and clearing services to retail and institutional traders since 2007. OPF is licensed under the Securities Commissions of Malaysia and offers cash-settled derivatives instruments traded on Bursa Malaysia, as well as select major derivatives exchanges around the world.

Oriental Pacific Futures articles published on the Corporate Website (www.opf.com.my) may be reprinted, reposted or distributed free for educational purposes only on the condition that Oriental Pacific Futures and the Corporate Website link information http://www.opf.com.my are included. However, other organizations are invited to link to articles that are available in the public area of the Oriental Pacific Futures’ Learning Resources website. No additional permission is needed for such a link.