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Frequently Asked Questions About Trading Futures and Options

 August 09, 2007 12:17 AM

 What is the biggest mistake made by many futures traders?
The biggest mistake that most traders make, especially new traders, is trading too much with too little capital. There are sound mathematical reasons to expect such trading activity to ultimately result in loss and, in fact, this has been confirmed by numerous reports and surveys within the industry: most traders starting out with $5,000 or less tend to lose their money within the first six months of trading. The key to successful trading is to gauge your trading activity based upon your capital, and allow plenty of cushion in the form of excess margin for unexpected price movements.

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Is it possible to make really big profits trading futures?
Yes, it is, but keep this in mind. There is a relationship between risk and return that has shown to hold over time, namely, that higher returns are often associated with higher risk. So while it is possible to make big profits trading futures, the trader is also exposed to considerable risk - risk of losing money. Beginning traders are probably better off "lowering their sights" a little and, consequently, playing it more safe.
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What exactly is leverage?
Leverage is a measure of the market value of your futures position relative to the amount of your trading capital. The greater the degree of leverage, the more futures value you control relative to your capital. Futures contracts, in themselves, are highly leveraged instruments: a little bit of money controls a lot of futures value. For example, some futures can be bought or sold for as little as two percent of the market value of the futures required as margin. It is leverage that enables tremendous profit or loss to be made relative to your trading capital. High-leveraged trading implies that you are using almost all of your available capital to meet margin requirements, and entails considerable risk as it can result in significant gains or significant losses. Low-leverage trading implies that you have plenty of excess capital in your account to cover unexpected price movements, and is consequently less risky.

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7/30/2009 10:08:23 AM
by Khalid
how to devote futures P/L in case of trading in the market with a small capital?

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