Trading Futures, Part 1 - Is This the Way?
Taking my skills to the Futures Markets and using prop firms to start the journey.
I am about to try something new, and I am going to share it all with you.
Futures trading is something I have never taken the time to focus on and because of that, I’m a little ignorant on how it all works.
Or at least I was. Not anymore!
This is the first part in a series about my ventures into trading futures and I hope it helps you unlock some of the mystery (and perhaps fear) of trading these markets.
If you have wondered what it is like to take the first steps into this world of trading, you are about to get a first-hand account.
And if you’re not interested in trading futures, no worries. There is no change to the newsletter, the focus remains on trading with an emphasis on options.
I will just be mixing in updates from the futures side of the house as well.
Go ahead and wish me luck, I don’t mind!
I expect things to start off a little rough, but we will see how it goes.
I mean that literally, you and I will both see how it goes as I’ll be sharing the progress of my account and the lessons I learn. I am sure there will be many.
So let’s get to it!
My first lesson is, you do not have to risk thousands of your own dollars to make money trading futures.
Prop Firms
I was skeptical at first but after doing some research you will find there are a few big names in this space worth looking into.
I am talking about futures trading prop firms.
If you are not familiar, these are companies that will allow you to trade a simulated account with the chance to make real money in exchange for a relatively small monthly fee.
They all seem to be set up in similar ways but with some small nuances that have big impacts to your ability to be successful.
I am not going to endorse any of these firms (yet) but I will tell you what I know so far based on my experience going with Topstep.
First, you are not given a chance to make money right away. You have to first past a “testing phase” of sorts.
There are multiple different levels and a couple of variations on how it can work, I will get to some of that in this newsletter and more later.
But it is important to first understand that you don’t just get an account to trade without first proving you have solid risk management and can be consistently successful.
Testing Phase
The way this works is you will be charged a monthly fee to open a “test account” and you will use this simulated account to trade in real time.
You are given rules to follow and objectives to meet, all within the constraints of whichever level of account you select.
(Account size selection is a little tricky, later I’ll explain how to make it a simple decision in the next part of this series.)
Your objective is basically to hit a profit target. There are some restrictions around that which are intended to ensure you don’t simply YOLO your way to the target.
They want to see a consistent strategy being put to work.
If you break the rules, your account is immediately closed which sounds harsh but really it just means you can’t trade until you pay a reset fee to “reset” your account.
And the intent here again is to ensure you are practicing sound risk management.
For example, one rule is you will have a maximum loss amount for your account. If your account drops below this level at any time, the account closes.
You would then pay to reset your account immediately, or you can wait for the following month’s fee which should also reset it.
Another rule to watch for is the maximum daily loss limit. This will be less than the maximum loss for the account and it won’t close your account.
The maximum daily loss will pause your trading until the next trading session. You will be able to resume trading without paying for a reset.
You might have a maximum loss allowed of $3,000 total but a daily limit of only $2,000, which will impact your decision making.
So, if you do not hit your maximum draw down you will not have to pay any additional fees and your account remains active, but you do need to pay attention to the daily limit.
You can now hopefully start to see how these firms make their money.
The drawdown limits are tight which requires strong risk management skills. If you don’t have them, you can spend a lot of money on the reset button.
That said, the cost is typically between $50-$150 per month and per reset. This is a lot less than the $5,000-$25,000 you might need to open your own futures trading account.
The constraints that are put in place do help the prop firms make money. But they do have many “funded traders”, which are those that pass the test phase and recieve a funded account.
As a funded trader you are able to continue trading through the prop firm and can collect your profits as you go. They take their percentage off of the top and restrict how much you can withdraw at one time, but it makes sense to me.
You are given an opportunity to trade and they are providing the platform, so they get their cut. From what I have seen it typically looks to be around 10%.
Ultimately, your success is both your goal and the goal of the prop firms. They want you to succeed and start making money for them.
I will dive into account selection, starting out, and more of the rules and details involved with using a prop firm.
And I am definitely going to discuss the beauty of being able to trade in the evenings and before the market opens. This is great flexibility if you work all day.
I started to trade last week and while I was just testing the waters, you can see in the snippet at the top that my $100,000 is slightly green.
Here we go!
-Nate
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