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Title: The Five Big Lies About Futures Trading
Author: Richard Delaney
Article:
<b>The Five Big Lies About Futures Trading</b>
You don't have to be a victim of the "40 - 40 - 40 plan" (40
hours a week for 40 years followed by a 40% reduction in
income!), but to acquire wealth you must work for yourself, at
least part-time.
If we were going to imagine the best possible business, it would
have these characteristics:
* Run by YOU: no staff; no inventory; no advertising; no
customers; no employees; no office; no competition
* Can be started with little money
* Can make money regardless of economic climate
* Can be done starting part-time
Is there such a business? Yes: trading commodity futures. Unlike
the stock market, futures contracts represent an interest in
real commodities - things people need and want: wheat, coffee,
sugar, money, cotton, orange juice, lumber, heating oil, and,
yes, frozen pork bellies!
Futures are the perfect business because of leverage. Leverage
means you control a lot of resources with only a little of your
own money.
Futures traders are not required to put up the entire value of a
contract. Rather, they are required to post a margin that is
typically between 2 percent and 10 percent of the total value of
the contract.
For example, the margin (the amount of money you have to put up
to buy or sell a futures contract) for wheat is currently $700
per contract. If wheat was selling for $3.50 per bushel, one
wheat contract (5,000 bushels) would be worth $17,500. Your $700
"controls" $17,500 worth of wheat. That's a ratio of 25 to 1.
Now THAT'S leverage!
Are futures traders just gamblers, speculators, crazy
risk-takers? No! We're actually <b>helping</b> farmers, dealers,
and manufacturers reduce their risk by taking it on ourselves.
For this we should be rewarded (when we're right). And we are!
While it is true that futures markets can be used for
speculating, that is not the primary reason for their existence.
Futures markets are actually designed as vehicles for hedging
and risk management, that is, to help people <b>avoid</b>
"gambling" when they don't want to. For example, a wheat farmer
who plants a crop is, in effect, betting that the price of wheat
won't drop so low that the farmer would have been better off not
planting at all. This bet is inherent to the farming business,
but the farmer may prefer not to make it. The farmer can hedge
this bet by selling a wheat futures contract. Someone has to buy
that farmer's wheat contract, and that someone is us
"speculators".
Unfortunately, there are a lot of people, some of them well
meaning, who don't want us to succeed at futures trading. To
discourage us, these people perpetuate what I call the "Five Big
Lies About Futures Trading." Here they are:
<b>BIG LIE # 1:</b> I'll lose all my money trading futures.
<b>THE TRUTH:</b> You can lose all your money trading futures -
but ONLY if you don't have a trading plan, a money management
plan, and the discipline to stick to them.
<b>BIG LIE #2:</b> You need a lot of money to trade futures
<b>THE TRUTH:</b> Some futures contracts, especially in the
grains group (wheat, corn, oats) have a margin requirement of
under $1000.
<b>BIG LIE #3:</b> You have to be a high-powered expert to trade
futures successfully.
<b>THE TRUTH:</b> Futures markets are very simple, and keeping
up with them is also very simple.
<b>BIG LIE #4:</b> You have to stay glued to your computer
monitor every minute the markets are open.
<b>THE TRUTH:</b> With some trading strategies you only have to
look at charts once a day.
<b>BIG LIE #5:</b> The big guys get all the inside information
(called fundamental analysis) before us and take all the profits.
<b>THE TRUTH:</b> Forget fundamental analysis, weather forecasts
in Ghana, and USDA grain reports. Stick to what the market is
telling you through the charts.
Futures markets are actually quite simple. For example, they can
only go in three directions: up, down, or sideways.
Also, there are only three positions: long, short, or not in the
market. (As Larry Williams, one of the greatest futures traders
of all time, said, "Not having a position is a position.")
Commodities exchanges are closely supervised by the Commodities
Futures Trading Commission (the CFTC). Commodity producers
(farmers, manufacturers) use futures exchanges in order to
reduce risks of price fluctuations.
To become successful at futures trading you only need to master
a few basic concepts:
* What to trade, and what not to trade
* Contract specifications
* Leverage and pyramiding
* Getting in
* Protecting your backside
* Getting out
* Stop-loss orders
* Limit moves
* Reading chart patterns
* Give-back
* Paper trading
* Money management
So ignore the scare tactics, learn how to trade futures
successfully, start small and trade carefully following the
concepts listed above, and declare your independence from the
"40 - 40 - 40 Plan"!
To learn more about how to successfully trade commodity futures
contracts, visit <a
href="http://www.futures-profits.com/"><b>www.Futures-Profits.com
</b></a>
About the author:
The author has been analyzing and trading commodity futures
contracts profitably since 1994. He quit his day job in 1998 and
has been trading futures full-time ever since.
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