Investing in futures for beginners

Investing in futures contracts

First of all, the question is wrong, although it is quite easy to see some people recommending investing in futures.

Futures contracts are not for investing, at least from a point of view of classical investing.

We can, nonetheless, do short term trading or speculation with them.

I want to invest in futures

Even if we buy a future contract that matures in 5 year s, we would not really invest, although in that period we could start talking about “investing”.

Even though we can do long term bets on certain assets I prefer to follow Andre Kostolany’s definition of speculation which would be one the covers a period from 6 months to 3 or 5 years.

The same we can say about stocks when we buy and sell them 4 months later.

We should not be talking of investing here.

That is short term trading looking for short term profits.

In that respect only long term investing in stocks, bonds or real estate is proper investing.

Things are clearer when we talk about day trading, which is what those referring to “investing in futures” are really talking about.

The majority of people who read the newspapers or websites citing that so called activity of “investing in futures”, have not the necessary capital to trade the markets properly, let alone investing.

This reminds me that the best thing to differentiate between trading and investing is that of leverage.

Basically if you are using leverage you are not investing, you are rather, trading, speculating or betting.

Obviously, investing in the long term with leverage is a suicidal project.

You only need to have a look to those ETFs quoting some futures market using 2 or 3 leverage to realize that you will not go very far in the long run with it.

Those kinds of ETFs slowly lose capital year after year until the point they lose more than 99% of their original capital.

Commissions, rollover and maintenance eat all the account in a short while.

It is as if you are losing a 10% every year just because you are leveraged.

Leverage is only acceptable for the short or medium term.

Anyway, a possible investing in futures strategy could consist in buying a long dated contract for more than 5 years without leverage.

Without leverage we can resist a 20% fall in the asset without major issues. However with leverage of 4 to 1 that kind of fall is a nightmare.

Therefore when we are leveraged we are far from the tranquillity of long term investing and we enter the dangerous world of short term trading.

It is possible that in the middle we can find a field where we can trade efficiently and also get some profits. Although it is difficult to find it using too much leverage for it is too risky.

The problem that a lot of people who “invest in futures” is, is that they try to trade those assets without the proper amount of capital and start doing day trading aggressively.

If you do not have USD 50.000 it is better that you do not try the futures path. And even with that amount we will not last too much if we are going to try frequent day trading.

It will not be easy to defeat the market makers who spent so many years in the pit selling and buying contracts.

A better approach would be to try to do less frequent trading and more concentrate in looking for the trend. But that is not very funny, especially If you have to let your positions open all night, which most people are scared to death of.

Investing in financial futures, yes or no?

Those dreaded overnight positions are often cited by the “day trading experts” as one of the reasons not to do longer term trading but do the intraday markets.

Futures day trading is not very different from binary options, Forex or CFDs, apart from the fact that we would be trading in a centralized market.

Although the futures brokers do not need to do anything strange since the traders are more than enough to destroy themselves, especially those fanatic day trading.

It is a bit sad seeing the word “investing” being associated to day trading of all kinds.

Perhaps a hedge fund can buy some DAX futures to cover some position in a certain moment, but retail traders will invest in futures because that is an oxymoron or impossibility.

You do not invest 10.000 pounds or dollars buying a 100.000 contract. That is called betting or trading.

Curiously enough, it is long term investors those who survive the longer and make the best money in the long run in the stock market. However, those are not futures or binary options “investors”.

Regards and good trading.