Futures trade
Those who dream of "rags to riches" will find that living in a capitalist society offers many roads to their goal. While some roads are slow and steady with obstacles that are clear and discernible, others are well-known for their numerous pitfalls and frequently invisible traps. Quite often the degree of anticipated reward is a function of the degree of risk and the length of time required to reach the destination.
As the world has become more technologically advanced, hastening the speed of communications and facilitating the growth of a near global economy, opportunities for financial success have increased significantly.
In the search for faster avenues to wealth, investors and speculators have often turned to futures trading as their vehicle of choice. In their desire for speed, however, they have often failed to remember that "speed kills". Driving to the destination at a leisurely pace of 30 miles per hour may take a good deal of time, but the odds of arriving safely are clearly in favour. On the other hand, breakneck speeds of 150 miles per hour may get there sooner, but they also require impeccable driving skills and high speed crash protection gear.
There is always a trade-off between the degree of anticipated reward and the degree if necessary risk. In the end, risk and reward, as well as the vehicle select to take the selected goal at the desired speed, are individual matters. Some investors believe that they can achieve their goals quickly and given their expertise, knowledge and self-discipline, they are correct in their analysis. Sadly, however, too many investors either over estimate their abilities or under estimate their tolerance under fire. They emerge as losers in the high stakes, fast-paced game of futures trading.
In part, their failures are due to misunderstandings of both the markets well as their own abilities. Although it is possible to correct factual misunderstandings by education and elucidation, it is an arduous task to correct ignorance of self. Myth and misconception lurk insidiously beneath the thin layer of promise offered by the futures markets. Myths and misconceptions are frequently born of and perpetuated by ignorance, hope and fear.
History has been unkind to the future markets. Since the earliest days of grain trading in the futures pits of
Market corners, financial schemes and clandestine dealings have provided colourful material for books and powerful ammunition for critics of futures trading. To some, the mere mention of the word futures conjures up images of overbearing floor brokers, fast-talking traders, flimflam schemes and ruthless speculators whose one and only goal is to take money from a native investing public. The sordid reputation sometimes associated with futures trading is no longer warranted due to the numerous regulatory changes that have "cleaned up" the markets. Negative stereotypes are, however, often difficult to eradicate. They fade only with time.
Notwithstanding the persistent negative attitudes about futures trading based on its checkered history, the futures markets have long been considered too risky, too complicated and too sophisticated for the average investor. For too long futures trading was either ignored or shunned in economics texts and as a consequence, the general public has remained ignorant of how futures trading works, how it serves a vital economic purpose and how individual investors might benefit financially from trading. Mired in myth and ignorance, the average investor has not been able to make informed choices about the possible benefits of futures trading.
Nevertheless the individual investor accepts traditional vehicles such as stocks, bonds and even stock options, as valid and viable investment instruments. For many decades the public has believed that trading in stocks has more historical justification, more stability, less risk and therefore, more validity than trading in commodity futures.
COMMON MISCONCEPTIONS ABOUT FUTURES TRADING
Before launching into an explanation of precisely that futures trading is, let us clear the air of several common misconceptions that contribute to the standard objections often raised about futures trading. Generally, objections to futures trading are based on either partial or distorted facts. Here are a few of the misconceptions and objections followed by factual retorts and explanations.
You can lose all your investment capital or more, if you trade in the futures markets. However, the key word is "investment". Trading futures should in no way, shape, or form be considered an investment. As a speculation, however, the rules of the game become substantially different from the rules of investing high risk is necessary for high reward. Nevertheless, even "high risk" does not mean that the common sense rules of effective trading and money management should be ignored.
By using solid risk management you can substantially reduce the risk of losing all your starting capital. Sense and sensibility are the keys to preserving capital. Following the well established rules of risk management helps reduce the odds of "losing it all". Finally, it has been demonstrated that a balanced investment portfolio consisting of both stocks and futures performs better, on average, than a portfolio consisting exclusively of stocks. Hence, futures trading should be only part of an overall investment program and as such, you are unlikely to "go bust".
Trading in futures is a gamble.
This is another misconception. Anything in life can be a gamble. A gamble is so defined by its odds of success and its rules of implementation. Trading in futures is technically and fundamentally no different from trading in stocks. Due to lower margins the odds of making money in futures are probably lower than those of making money in stocks.
Ultimately, however, the possible percentage return in futures trading is considerably greater than the potential return in stocks. Futures trading is, therefore, no more of a gamble than trading in stocks. Carefully and closely following the rules of successful futures trading will help reduce the risk. Traders who fail to follow a plan for and system of, futures or stock trading are gamblers.Only ?insiders? can profit from futures trading. It is a rigged game.The markets are manipulated to benefit the rich and powerful. These three misconceptions go hand in hand. There is probably less inside information available in futures than in the stock market. The United States Department of Agriculture, the Commodity Futures Trading Commission and the National Futures Association have imposed very stringent limits on the total number of positions a trader may hold. They monitor the brokerage industry and large trader transactions very closely. The use of inside information is prohibited by law and strictly enforced.
Important government information is guarded and kept strictly until the scheduled release date and time. In this way, the markets can function freely and with minimal effects of insider information. In fact, most markets cannot be manipulated for other than very brief periods because they are too complex and diverse for any one individual or group to affect prices over the long run. Although unavoidably some traders will always have an edge based on inside information, success in the futures market is entirely possible without access to such information.
Trading in futures serves no economic purpose.
This myth could not be further from the truth. The
futures markets serve to stabilize prices. In fact, we often forget that future markets in the
The speculators provide liquidity because they are often willing to take market positions when prices are fluctuating significantly due to news, weather, crop conditions and so on. They stabilize prices by buffering extreme moves of the traditional players.
Prices would move more viciously and the hedgers could not enter and exit the market as efficiently were it not for the speculators buying and selling regardless of price levels. Supplies would stand a good chance of being disrupted.
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