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The “Choosing Markets To Trade" article examines and elaborates upon on how to choose the individual markets offering commodities and futures contracts in order to avoid mistakes and ensure success. It emphasizes margin requirements, tick prices, location and capital at risk.
The markets you choose to trade should be a result of careful reflection on your part. Ideally, you should trade those markets where you have already a thorough understanding. These would be the markets that you have thoroughly researched, analyzed, and have prepared market strategies to implement trades. The markets you can trade will also be dependent upon the amount of capital available, the type of risks you are willing to take, the potential rewards you are seeking, and where you are located.
Margins in commodity markets
Each individual market for commodities and futures has differing margin requirements. Unless you are a person of unlimited means, some of these requirements may prove to be prohibitive, thereby limiting your choices.
Generally speaking, markets that require large margin requirements do so because of the inherent volatility. Large margin requirements can be equated with large risks. Before considering these markets, you should have developed experience and expertise in less risky markets. Trading with these types of contracts is not for the faint of heart. Any beginner venturing into these markets is only asking for trouble. It is highly recommended that all novices begin their trading in those markets with the smallest margin requirements. Keep in mind in order to best limit risk, you should be prepared to trade at least a half a dozen different venues in varying group categories.
Reviewing your trading personality
Which markets you trade will be a function of your personality. Some individuals will take a long period of time in observation before committing to a trade. Others can make very quick decisions based on the belief and confidence in their trading methodology. For the novice trader, it is best to investigate and choose markets that move in modest fashion. Highly volatile markets may offer the best returns for an experienced trader, but should be avoided by the beginner.
Understanding the nuances of each market
Each market has a different minimum price change and value. These are referred to as the tick size and take value per contract. It is advisable that least when starting out, you limit yourself to those markets with low tick size and value. This will preempt you from losing the margin placed for each trade in a rapid fashion.
Evaluating trading hours and geography
Where and when you want to trade is also a factor to take into consideration when choosing markets. Normally, you would want to trade those markets operating at a convenient time during your waking hours. Consequently, Americans would generally trade the American futures markets, while Europeans and Asians trade their local markets. This, however, does not stop an American from trading European markets if you are generally a night person, as the time difference is only six hours from the East Coast of the United States.
In summary, it is highly recommended that you choose a portfolio of markets for which you have well prepared yourself in both a fundamental and technical manner. For the novice trader, these markets should have low initial and maintenance margin requirements, be relatively calm in nature, be characterized by low tick sizes, and be easily accessible from your geographical location.
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