Finance

Is Trading Futures Risky Or Safe? See Why Its The Best High Yield Investment!

In my opinion the best high yield investment is futures, there’s no doubt in my mind. But trading futures on your own with very little experience or without a long term strategy or a strategy that hasn’t been tested is like running onto a battle field with a rifle and thinking “hey I have a rifle, I should be ok as long as I don’t get shot at”. This analogy sounds stupid but its what so many new traders do on a routine basis, and it’s a routine bound for inevitable disaster. Futures have long held the stigma as one of the highest risk investments available, and understandably so with almost 95% of new traders entering the market losing most of their investment within 6 months of the day they started. But let me ask you this, if investing in futures were a guaranteed loser then why would there be any investors at all? The obvious answer is because that other 5% makes money and a lot of it! So the next thing you’re probably thinking is aren’t those 5% making money at the expense of the other 95%? In partial this is true. But mostly it has nothing to do with those other 95%, they just add more buyers and sellers to the market thus creating more liquidity and being able to get out of the market, this is similar to selling a house with numerous offers on it and having a market filled with buyers and sellers at the same time. The bulk of the futures market movement consists of hedgers and fundamental events that drive the majority of investors or hedgers to buy or sell, it’s not so much about what newbie speculators do.

In my opinion the best high yield investment is futures, there’s no doubt in my mind. But trading futures on your own with very little experience or without a long term strategy or a strategy that hasn’t been tested is like running onto a battle field with a rifle and thinking “hey I have a rifle, I should be ok as long as I don’t get shot at”. This analogy sounds stupid but its what so many new traders do on a routine basis, and it’s a routine bound for inevitable disaster. Futures have long held the stigma as one of the highest risk investments available, and understandably so with almost 95% of new traders entering the market losing most of their investment within 6 months of the day they started. But let me ask you this, if investing in futures were a guaranteed loser then why would there be any investors at all? The obvious answer is because that other 5% makes money and a lot of it! So the next thing you’re probably thinking is aren’t those 5% making money at the expense of the other 95%? In partial this is true. But mostly it has nothing to do with those other 95%, they just add more buyers and sellers to the market thus creating more liquidity and being able to get out of the market, this is similar to selling a house with numerous offers on it and having a market filled with buyers and sellers at the same time. The bulk of the futures market movement consists of hedgers and fundamental events that drive the majority of investors or hedgers to buy or sell, it’s not so much about what newbie speculators do.

So now we are left with the question of: If 5% of futures traders do make money than how are they doing it. Simple, they are utilizing back tested systems usually ran by computers (these days), for consistent execution of entering and exiting the market. Automated Trading systems have gotten very popular over the last 8 years with the bulk of the market no longer phoning in orders but placing them on a PC whether that be manual or automated. Now knowing this is half the battle. You still need to find a trading system that can withstand the test of time and not just work for a short period of time until the market conditions change. This is one of the largest flaws of most computer-generated systems; they aren’t people so they can’t use reason to change their pattern. They tend to operate based on some kind of trend trading contrary to the market direction. Then once the trend dries up the system operates in direct conflict with the markets pattern. I like using an automated system that is based on directional movement not fighting the flow of the market. When the system sees that the market is trending for a hard move in one direction or the other that’s the way it trades. The beauty of trading futures is that it has nothing to do with recessions, or whether the market moves up or down. You are able to profit from it moving in both directions (long: profiting going up) or (short: profiting going down)

Another widely misunderstood fact about futures is that you’re not actually investing in anything. What a futures trading strategy really is “like the one I use” is actually just an equity machine. There is no waiting period to get your capital back, your money isn’t tied up for more than a day, and you are leveraging a large volume tangible commodity or cash to your advantage. Allow me to explain: When you trade futures or forex you are trading a contract for a bulk order of currency or a commodity. The money that you have in your trading account is used as a good faith deposit just like earnest money on a house. When you initiate a buy or a sell in any of the futures markets you are using your earnest money to control that commodity or currency for a short period of time just as in the same way you have the right to buy or transfer the rights to a house you have a deposit on. When entering the market you are then hoping to take advantage of a price difference just like equity in a home and then sell back your contract for a profit. What’s nice is that unlike home equity you can take advantage of the loss of value on a futures contract, the value will also change much much faster than a home even in one day, and the market is always liquid with plenty of buyers and sellers.

This is the reason why good futures traders and Commodity trading advisers tend to make high returns because your not holding onto something that takes for ever to rise in value over time, you’re simply taking advantage of prices up or down multiple times per day or per month. A good trading strategy will lose once in a while there’s no way to combat that, but if it is a good strategy it should return you 2 or 3 times what it loses on average. When viewing the long term performance of a system don’t pay so much attention to how much it gains but how consistently it gains. I would rather have a system that earns small amounts steadily than one making insane profits only to keep you up at night because it yo yo’s back and forth so much. So you can see how you’re not really investing in anything just a way of quickly extracting money from the market and pulling out again.

My recommendation to beginning traders is this, if your going to begin trading futures the best place to start is by finding a good CTA (commodity trading adviser) and having them manage your futures account. There are plenty of CTA’s with good track records. Many CTA’s use automated trading systems that they monitor and adjust themselves on an on a daily basis. Good CTA’s know what trends to look for and adjust trading for your risk tolerance. A commodity-trading adviser has power of attorney on your account he does not have access to your funds. A third party clearing firm connected with the brokerage your using insures and holds the funds. Generally you have access to the funds within 1 business day.

Are Futures extremely risky? I’ll let you decide. Most financial advisers will discourage you from futures and for very good reasons as I stated above. But when you do your homework and find a good strategy using common sense principals as I’ve discussed in this article you will have the best high yield investment you can find that performs ten fold to what your regular investment portfolio can produce, and the best part of all is that the state of the economy will have nothing to do with how well it performs.

Want to find out more about the best high yield investments, then visit Eric Christensen’s site for information on High Yield Investment Accounts with a registered CTA.