Trading futures is a form of investing that can provide diversification to a portfolio and help you manage risk. Futures contracts apply to agricultural commodities, rising and falling as the supply and demand of items such as corn, steel, cotton and oil change. You can make money trading futures if you follow trends, cut your losses and watch your expenses.
Futures markets have trends, just like other securities markets do. Commodities tend not to have the same volatility as stocks, but can also be less predictable. When you identify a trend through rigorous research and testing, it represents your best chance to profit. Research involves looking into which factors impact the supply and demand of the commodity that you're interested in. Testing involves making simulated investments in futures that you think you see trends in, to see whether a real investment would have worked out.
Cut Losses Short
Anyone who invests in futures long enough is going to purchase contracts that lose value. If a particular contract starts to move contrary to your expectations, strongly consider selling short and taking a small loss. The alternative may be waiting for the contract to rise in value, only to see it fall further. Since every contract you buy is with the expectation that it will see gains within your time horizon, cutting losses short by selling will maximize the return that you get back to invest elsewhere, and offset other gains when you calculate income investment for your taxes.
Margins and Expiration Dates
Investors trade futures on margin, paying as little as 10 percent of the value of a contract to own it and control the right to sell it until it expires. Margins allow for multiplied profits, but also make it possible to risk money you can't afford to lose. Remember that trading on a margin carries this special risk. Select contracts that expire after the time when you expect prices to reach their peak. A March futures contract is useless if you buy it in January but don't expect the commodity to reach its peak value until April. Even if April contracts aren't available, a May contract is more appropriate since you can sell it before it expires but wait until after the commodity's price has a chance to rise.
Brokers and Expenses
Investors trade futures contracts through traditional brokers as well as online broker services. Online services offer less personalized advice but are also less expensive, offering trades for less than $1 in some cases. Use an online broker and perform your own market analysis to keep costs low and increase your net gain from trading futures. Track all expenses, including broker fees and subscriptions to online or print publications that help you invest, to deduct them as investment expenses on your income taxes.
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