Challenges of Futures Trading

Participants in markets have a variety of different objectives strategies to achieve them, and while shorter term trading is always practiced in all markets, this approach will play more or less of a prominent role overall.

In the futures market, short term speculation plays a huge role, more so than any other type of securities market, mostly because futures contracts themselves are short term. While some people do roll them over and trade them as if they were continuous contracts, the general focus is on the shorter term to be sure.

Challenges of Futures TradingSo, although there is not the long term expectations that other markets such as the stock market has demonstrated, this really doesn’t matter because traders really don’t care what the price of an asset is a few years from now, or often not even a few months from now.

While a lot of investors seek to enjoy the benefits of this long term view, where the stock market enjoys the benefit of all the new money that we see being put into it, making it not a zero sum game from the perspective of the investor, the futures market is actually a zero sum game from everyone’s perspective.

If a number of investors, we’ll say everyone that enters the market long term during a particular year, decide to just hold their investments, and the investment returns 8% we’ll say over the long term, they all may expect a positive outcome, and if this comes to pass they will.

The growth actually comes from future investors driving the price up and causes sustained demand over time, but as long as this all continues, these future investors may expect the same positive expectation as long as future investors from their perspective keep the cycle going.

The futures market provides no such advantage though, and it really does pit one investor against another in a battle to see who is right when positions are taken. For every profit in the futures market, there is an offsetting loss by someone else.

This does serve to make the futures market more competitive than other markets such as the stock market, when you consider both the zero-sum effect of futures trading as well as most of the action being driven by trading and not by other strategies such as investing or even hedging.

How Individual Traders May Compete

There is a view held by many that given the fierce competition among traders, the money will flow from the less skilled traders to the more skilled traders over time, much like we see with the game of poker where the money goes from the poorer players to the better ones over time.

Given that futures trading is purely a game of skill and does not substantially rely on elements of chance as poker does, where one may have runs of good luck and bad luck and this affects players in the same way regardless of skill.

With poker, the money flows over time, when these elements of chance even out, but with futures, there are no random elements involved and it is all about successfully predicting the movements of price, which is entirely a skill based task.

Professional traders are no doubt better positioned to succeed, given their level of experience and track records of success. Among professional futures traders, there is of course a distribution of success relative to their levels of skill, with the best traders enjoying the best results, on down the line to those who end up failing miserably.

Many wonder what chance a less experienced trader may have to succeed, to not be one of the participants which gives to the market rather than takes from it, one of the people that the money flows from rather than to.

What we need to realize though is that while it is an advantage to trade futures full time over more casual futures trading, since this is a skill based enterprise, it really does come down to how much skill a trader has, and nothing else.

While it certainly can be helpful to trade anything full time over part time, as one has a better opportunity to develop these skills needed and one also tends to be more dedicated to the task since it is one’s livelihood, it is not necessary.

What this does require though is that one indeed become good enough to be able to trade one’s account for a profit, which doesn’t quite mean in the upper half of market participants as far as skill goes, because not all participants trade, and we have to account for the hedgers as well, whose participation is driven by things other than short term speculation, to lock in a certain price for the asset.

Among futures traders, while there is a certain amount of what we could call dead money, traders who do not know what they are doing really, a lot of the money is very much not dead and is being used by traders who do indeed know what they are doing, and this does serve to raise the bar a fair bit.

The Focus Is Still on Beating the Market Though

It really comes down to traders seeking to develop their skills enough to simply beat the market, and while we may say that in any futures position, someone is taking the other side and you have to be better than they are, we don’t really even need to look at it from that perspective and ultimately it simply comes down to how good your predictions are as far as price movement goes, and nothing else.

While being able to predict futures markets may be more difficult than with other markets at times, for instance with the stock market, this depends at least somewhat on the asset traded. If we trade a stock index such as the S&P 500 for instance, we are actually looking to predict movements in the stock market, so we can’t say it’s more difficult to trade that, and movements are ultimately driven by movements in the underlying stocks.

With some other assets though, traders can indeed be more at a disadvantage, due to things like insider knowledge, but the shorter the time frame, the less effect this has, and with very short term trading, fundamentals really don’t play much of a role if at all.

Fundamentals may tell you where the price of an asset may be heading, but it cannot tell you where it may be heading in the next few hours or the next few minutes.

On these time frames, it all really comes down to how good of a technical trader you are, and while there are a lot of good technical traders that trade futures, this has less of an effect upon things than many people imagine.

The only real drawback of this is that this will tend to make trading more difficult, with more people trading the trends that you seek to trend, but not everyone trades the same trends as you do and the trick is to find trends that do perform reliably enough to trade them profitably.

If you see a lot of profit taking after a certain movement for instance, you simply look to focus on getting out a little earlier before the trend turns around too much, and while this does involve a battle of wits, that’s what trading is.

If a trader is skilled enough to produce profitable results, that’s all there is to it, and the market is the real opponent here, not individual traders. One’s results against the market is what is tracked and paid out or paid to, nothing more or nothing less.

The Challenge of Money Management with Trading

Perhaps the biggest challenge for a lot of budding futures traders is being able to manage their accounts in such a way that they can manage risk properly. The much higher leverage that futures trading offers can be either a good or bad thing, but when not handled properly, this can be the undoing of even skilled traders if they are not careful.

There are even legendary traders that have gotten themselves in all sorts of trouble by not managing trading risk properly, where they end up with positions that are simply too risky and this risk comes home to roost and does serious damage to their accounts.

Traders tend to learn this lesson the hard way, even the best, although it’s far preferable to have a very good understanding of how to manage these risks properly so that these events can be minimized.

There will always be risk and drawdowns to any trading account, but the goal is to ensure that these drawdowns do not place ourselves in uncomfortable positions, or worse. A lot of futures traders end up losing all of their money and this should never be something we want to risk happening.

Often though, the damage here occurs less dramatically, where it’s not one big loss that sinks the ship, but instead, many poor decisions that have a cumulative effect. Any time one’s strategy is not profitable, and things do not turn around, going broke is inevitable.

The goal, should one not be profitable yet, is to limit one’s losses until things turn around, and this is why spending enough time with simulated trading is such a great idea. This is where new traders mess up, and once you enter the game at a disadvantage and real money is on the line, you are just going to lose.

Once traders do end up trading futures with real money, they also need to make sure they are sufficiently bankrolled, and not trading with enough money, as well as trading too big for one’s account, are both recipes for disaster.

For those with smaller accounts, there is a much better alternative to trading with a futures account, where contracts for difference can be traded with virtually no minimums, as opposed to the minimums necessary to even trade mini futures accounts should one not be able to do so comfortably.

More than anything, one must not seek to be too aggressive with one’s futures positions, regardless of one’s track history and skill level. Futures trading is, like all trading, a game of probabilities. There are no certainties here, and we always want to make sure we’re OK when we run into instances where our predictions are incorrect, as they often will be, no matter how good we are.

The focus here in managing these risks aren’t so much whether we should enter a certain position with a certain size, it really always comes down to what our risk exposure is, how much we are prepared to lose on a trade.

This is where the rubber meets the road, our potential drawdown, and to the extent that we can avoid excessive drawdowns, we’ve managed our risk. It is often tempting to shoot for bigger profits but risk exposure always needs to be accounted for and is the more important of the two without question.

So, the first task is to get to a point where you achieve a profitable expectation over time, and then look to protect this advantage by not seeing this advantage get beaten down when you aren’t running so well. If traders can meet both challenges, they will enjoy success.

Eric Baker


Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.

Contact Eric: [email protected]

Areas of interest: News & updates from the Commodity Futures Trading Commission, Banking, Futures, Derivatives & more.