How to Trade

You can invest in the futures market in a number of different ways, but before taking the plunge, you must be sure of the amount of risk you're willing to take. As a futures trader, you should have a solid understanding of how the market works and contracts function. You'll also need to determine how much time, attention, and research you can dedicate to the investment. Talk to your broker and ask questions before opening a futures account.

Unlike traditional equity traders, futures traders are advised to only use funds that have been earmarked as risk capital. Once you've made the initial decision to enter the market, the next question should be, How? Here are three different approaches to consider:

Self Directed - As an investor, you can trade your own account, without the aid or advice of a Commodity broker. This involves the most risk because you become responsible for managing funds, ordering trades, maintaining margins, acquiring research, and coming up with your own analysis of how the market will move in relation to the commodity in which you've invested. It requires time and complete attention to the market.

Full Service - Another way to participate in the market is by opening a managed account, similar to an equity account. Your broker would have the power to trade on your behalf, following conditions agreed upon when the account was opened. This method could lessen your financial risk, because a professional broker would be assisting you, or making informed decisions on your behalf. However, you would still be responsible for any losses incurred and margin calls.

Commodity pool - A third way to enter the market, and one that offers the smallest risk, is to join a commodity pool. Like a mutual fund, the commodity pool is a group of commodities which can be invested in. No one person has an individual account; funds are combined with others and traded as one. The profits and losses are directly proportionate to the amount of money invested. By entering a commodity pool, you also gain the opportunity to invest in diverse types of commodities. You are also not subject to margin calls. However, it is essential that the pool be managed by a skilled broker, for the risks of the futures market are still present in the commodity pool.

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