The Risks of Futures Trading: What They Are & How to Manage Them

Futures trading refers to an exchange where the parties agree to buy and sell commodities or contracts at a future date. However, the prices are set at present to cover any future price movements. According to the Futures Industry Association (FIA), 19.24 billion contracts were traded in 2019. Although trading in futures can be very lucrative, it also carries significant risk. Continue reading to learn more about the risks involved and how to manage them.

What Are the Risks of Futures Trading?

The futures market is a high risk and a high reward trading environment. Your success at this risk capital depends on how to manage the following potential pitfalls:

Liquidity Risk

The futures market is not immune to the laws of supply and demand. There is never an assurance that you’ll find a suitable buyer when you want to sell your futures contract. Similarly, there might not be anyone in the market willing to sell to you after a set period of time.

Poor Timing

Timing is everything in futures trading. It’s not enough to know the market trends, such as when prices will likely rise. For instance, you might buy a futures contract today, hoping the prices will increase in the long run. Unfortunately, there might be a price fall immediately after weakening your futures position.

Failed Stop Orders

Stop orders refer to a pre-set condition that futures are to be sold at the market price when they reach a specific limit. The only problem is there is no guarantee that the broker will manage to execute the order. You might incur a more significant loss by the time they stop order is executed.

Operation Cost

Although the futures market is traded electronically, there is still some human element to it. Mistakes, such as entering a wrong date, can be costly. Some brokers may fill orders with higher prices to try and make extra money. It may lead to losses and disputes which cost money to settle.

Why Does Futures Trading Involve Risk?

Before you decide to try futures trading, you should understand there’s a chance you may lose the whole amount deposited. Although a certain amount of risk is part of any business venture, the futures market is very volatile. The main reason for this is due to uncertainty and rapidly changing economic context. There is no way of knowing what future market conditions will be, so analysis of existing data and trends is crucial.|

How to Properly Manage Futures Trading Risks

Despite the risks of futures, trading can be advantageous if you minimize the risks. We have put together the top priorities for how to handle risks:

Choose the Contract Carefully

While it’s true that you can’t exactly predict the future, you should evaluate futures contracts and choose one that seems more likely to meet your expectations. Other factors to consider before investing include risk tolerance, available funds, and possible returns.

Have Contingencies

Given the volatility of the futures market, it’s never wise to go in with just one plan. The safe option is to consider all possible outcomes and plan accordingly. Make a plan of how you will respond if the prices reach a certain level. Contingencies can help you protect your initial margin from unforeseen conditions.

Understand the Market

Although there is no sure way of definitively predicting future prices, it certainly helps to understand the market. It doesn’t matter if you’re letting a brokerage firm or Targets Trading Pro do the trading for you. Knowledge helps you prepare for possible outcomes, and this gives you a relative edge. 

We hope you now have a better understanding of the risk involved in futures trading. When combined with our risk management tips and algorithmic trading solution, you will make better trading decisions. Try Targets Trading Pro today!