One of the first pieces of advice new traders receive is to treat trading like a business. And, just like any business, trading has some costs associated with it that you need to be aware of regarding initial capital requirements, hardware recommendations and ongoing commission structures.
Over the last 10 years, more retail clients have been introduced to the futures industry. One reason for this business growth has been the exchanges promoting the industry to retail traders, according to Nicole Sherrod, managing director of the trader group at TD Ameritrade. “Historically, if you look back 10-20 years, the futures business was really targeted at sophisticated, professional traders. Now, more and more retail investors have been getting into the business of trading futures,” she says.
As you are getting started trading futures, one of the most important things to consider is your inital bankroll. Like many things, it is a balancing act — start too low and you put incredible pressure to succeed on yourself, but start too high and you might threaten other areas of your financial well-being.
Dave Gompert, senior market strategist at Trade Monster, recommends new futures traders begin with at least $5,000-$10,000, but that amount should not be more than 5% to 10% of your liquid net worth. Sherrod says many firms require a $10,000 minimum initial deposit.
Gompert says that if you start with a smaller amount, it puts you in the position of having to be right pretty much immediately. “While you could start with a smaller amount as a new trader, I don’t know that that is going to turn you into an old trader. It could get challenging because it’s essentially like telling a rookie baseball player, ‘You’d better go 4-4 in your first game, or we’re sending you back down to the minors,’” he says.
The primary reason for needing a sizeable bankroll to begin with is because futures contracts trade using margin and leverage. Gompert says that futures contracts average about 10-1 in leverage, meaning you typically must put up 10% of the value of the contract as margin. “So, even small movements in the market are multiplied by 10 in terms of hits to your capital or gains. Everyone loves them when there are gains, but losses can pile up really quickly,” he says. “If you don’t have much to start with, you could be out of the game quickly.”
In addition to ensuring you are capitalized well enough to begin trading, it also is important to have adequate access to technology.
The vast majority of trading is done electronically, so you need to make sure your computer system can handle your trading platform without slowing down or crashing. Also, ensure that your Internet connection is fast enough to receive up-to-date data feeds and to get your orders to the exchanges in a reasonable amount of time to avoid slippage.
This does not mean you need a cutting edge system, but it does need to be current, Sherrod says. “You want a fast system. You want to make sure that the operating system is fairly current. Speed is a really big thing in the futures market,” she says. “We encourage traders to consider it an investment to make sure their hardware is up to date.”
In addition to your technology, consider a prospective broker’s technology when you are shopping around. Does it offer a competitive front-end trading platform to its clients, or will you need to license one from elsewhere? Does it have a mobile app that allows you to monitor and make changes to positions on the go?