Get Started Trading Futures

How to Get Started Trading Futures – by Erich Senft, CTA

How to Get Started
TRADING FUTURES
By Erich Senft, CTA
SupportandResistance.com

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Limits of Liability/Disclaimer
The author and publisher of this book and the accompanying materials
have used their best efforts in preparing this program. The author and
publisher make no representation or warranties with respect to the
accuracy, applicability, fitness, or completeness of the contents of this
program. They disclaim any warranties (express or implied),
merchantability or fitness for any particular purpose. The author and
publisher shall in no event be held liable for any loss or other damages,
including but not limited to special, incidental, consequential, or other
damages. As always, the advice of a competent professional should be
sought where necessary.
This manual contains material protected under International and Federal
Copyright Laws and Treaties. Any unauthorized reprint or use of this
material is prohibited without express written permission of the author.

DISCLOSURE OF RISK:
The risk of loss in trading futures and options can be substantial; therefore,
only genuine risk funds should be used. Futures and options may not be
suitable investments for all individuals, and individuals should carefully
consider their financial condition in deciding whether to trade. Option
traders should be aware that the exercise of a long option would result in a
futures position.
Hypothetical performance results have many inherent limitations, some of
which are described below.
No representation is being made that any person will, or is likely to, achieve
profits or losses similar to those shown in this manual. In fact, there are
frequently sharp differences between hypothetical performance results and
the actual results subsequently achieved by any particular trading method.
One of the limitations of hypothetical performance results is that they are
generally prepared with the benefit of hindsight. In addition, hypothetical
trading does not involve financial risk, and no hypothetical trading record
can completely account for the impact of financial risk in actual trading. For
example, the ability to withstand losses or to adhere to a particular trading
program, in spite of trading losses are material points which can also
adversely affect actual trading results. There are numerous other factors
related to the markets, in general, or to the implementation of any specific
trading program which cannot be fully accounted for in the preparation of

How to Get Started Trading Futures – by Erich Senft, CTA

hypothetical performance results and all of which can adversely affect
actual trading results.

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Table of Contents

LIMITS OF LIABILITY/DISCLAIMER ................................................................... 2
CHAPTER 1.......................................................................................................... 7
SO, YOU WANT TO TRADE FUTURES? ............................................................ 7
A Brief History of the Futures Markets.......................................................................................................7

CHAPTER 2.......................................................................................................... 9
WHAT ARE COMMODITIES? .............................................................................. 9
COMMODITY EXCHANGES .............................................................................. 10
THE ANATOMY OF A FUTURES CONTRACT ................................................. 10
It’s a Contract… ..........................................................................................................................................10
In the Future… ............................................................................................................................................11
With Specific Dates… ..................................................................................................................................11
The Cost of Doing Business .........................................................................................................................13
Margin ......................................................................................................................................................13
Maintenance ..............................................................................................................................................13
Contract Size ................................................................................................................................................14
Tick Size Does Matter ..............................................................................................................................15
Buying – Going Long ...............................................................................................................................16

CHAPTER 3........................................................................................................ 20
TOOLS OF THE TRADE .................................................................................... 20
MONEY ............................................................................................................... 20
How Much Money? .....................................................................................................................................21
Start Up Money............................................................................................................................................22
Rule of Thumb .............................................................................................................................................22

How to Get Started Trading Futures – by Erich Senft, CTA

CHOOSING A BROKER .................................................................................... 23
Commissions ................................................................................................................................................25

MARKET INFORMATION .................................................................................. 27
Market Reports ............................................................................................................................................27
Charts ...........................................................................................................................................................27

GO HERE FOR FAST NINJATRADER DATA FEED:
HTTP://WWW.INDICATORWAREHOUSE.COM/SERVICES/FASTNINJATRADER-DATA-FEED/ ........................................................................... 27
FUNDAMENTAL VS. TECHNICAL .................................................................... 28
DAY TRADING VS. POSITION TRADING ......................................................... 29
Day Trading .................................................................................................................................................29
Position Trading ..........................................................................................................................................29

HOW TO PICK MARKETS TO TRADE .............................................................. 30
CHAPTER 4........................................................................................................ 33
PAPERTRADING 101 ........................................................................................ 33
HOW LONG TO PAPER TRADE ....................................................................... 34
CHAPTER 5........................................................................................................ 36
THE BASICS OF MONEY MANAGEMENT ....................................................... 36
Reward vs. Risk ...........................................................................................................................................36

THE BEST PIECE OF ADVICE EVER ............................................................... 37
TRADING REAL MONEY ................................................................................... 39

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How to Get Started Trading Futures – by Erich Senft, CTA

ABOUT THE AUTHOR ....................................................................................... 41

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Chapter 1
So, You Want to Trade Futures?
Ever since the movie Trading Places, where Eddie Murphy and Dan
Akyroyd’s characters struck it rich overnight trading Orange Juice
futures the public has been fascinated by the futures industry. In fact,
if you do any late night channel surfing you’ll see that Futures (also
know as Commodities) are once again at the forefront and gaining in
popularity.
While the late night TV hucksters try to convince you that “gold is
poised for a tremendous move” or that you can make it rich trading
the FOREX by watching two lines twist and turn, most people are
very unfamiliar with what futures are.
Trading futures is probably unlike anything you’ve ever tried before.
While futures are generally grouped with other forms of investments
like stocks or bonds, they are like neither.

A Brief History of the Futures Markets
The Futures market, also known as the Commodities market, has
been referred to as the World’s grocery store. It is here that buyers
and sellers get together to negotiate the value of a multitude of
products ranging from cotton to crude oil.
The commodity markets first began in the mid-1800’s when a central
exchange was formed in Chicago to allow farmers and grain dealers
to get together to buy and sell wheat.
The exchange originally only allowed for the immediate delivery of
wheat to the buyer; however it soon evolved to allow buyers and
sellers to contract for delivery of wheat at a future date as well.

How to Get Started Trading Futures – by Erich Senft, CTA

This is how the commodity business became known as “futures”.
The concept of contracting for future wheat worked well for both
parties. The farmers knew in advance how much their crop would be
worth, and the dealers knew how much they would be paying for their
wheat.
Sometimes a farmer decided that he did not want to deliver the wheat
for which he had contracted, and would sell his contract to another
farmer who would fulfill the agreement for him.
Similarly, the wheat dealer would sometimes choose not to take
delivery of the wheat he had contracted for and would in turn sell his
contract to another dealer.
It wasn’t long after this that speculators saw an opportunity to make
money. They began trading commodities, not to supply or take
delivery, but to profit on a short term difference in prices that might
develop.
Thus the world of futures trading was born.

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Chapter 2
What Are Commodities?
Today commodities encompass just about every aspect of everyday
life, so much so that we are almost totally unaware of their existence.
After all, when was the last time you gave any thought to where
General Mills buys their wheat, or from where Folgers gets their
coffee?
Commodities literally touch every part of our lives. See if you don’t
recognize just a few commodities from the list below:
Commodity
Corn
Wheat
Oats
Sugar
Coffee
Orange Juice
Cocoa
Cotton
Soybeans
Gold
Silver
Copper
Unleaded Gas
Heating Oil
Natural Gas
Crude Oil
Cattle
Feeder Cattle
Hogs
Pork Bellies
Lumber
Canadian Dollar, Australian
Dollar, US Dollar. British
Pound

Typical Use
used in cereals, snacks and as livestock feed
used in the production of cereals, breads, etc
used in cereals, snacks and as feed
used in everything from candies to vehicle fuel
world’s most popular beverage
what would breakfast be without OJ?
used in the production of chocolate
used in the production of textiles and clothes
the universal food, for people and livestock
used primarily in jewellery production
jewellery production and industrial applications
primarily used in industrial applications
something no gas vehicle can do without
staying warm during the winter months
for the other furnaces and as vehicle fuel
used in everything from fuel to plastics
steaks, hamburger
young cattle raised to replenish ranches
pork
also known as bacon
for building houses, furniture, etc
where would we be without our currencies?

And this is just the tip of the iceberg!

How to Get Started Trading Futures – by Erich Senft, CTA

Commodity Exchanges
All commodities are traded in specialize centers known as
Exchanges. The exchange governs all the aspects of trading and
acts as a venue for buyers and sellers to get together as well as a
“clearing house” to settle all the transactions.
The exchange also sets the trading parameters for each of the
commodity markets. This way buyers and sellers know exactly what
they are contracting for when they trade futures.
While there are smaller exchanges throughout North America the
major commodities exchanges are located in Chicago and New York.
The biggest exchanges are:
1. CME- Chicago Mercantile Exchange – Most of the grain
markets are traded here along with meats and many of the
currency and index markets. (http://www.cmegroup.com).
2. ICE – Intercontinental Exchange – Deals primarily with the
“Softs”, including sugar, cocoa, coffee, and orange juice as well
as Crude Oil, other fuels, precious metals and the Russell stock
index (http://www.theice.com).

The Anatomy of a Futures Contract
Most people assume that trading futures is similar to trading stocks,
bonds or other investments. This is not true. In fact, there are several
key differences that make futures unique.

It’s a Contract…

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How to Get Started Trading Futures – by Erich Senft, CTA

First off, as the name suggests, a futures contract is a contract for
something in the future.
In the world of futures trading you do not actually own the commodity
you are trading; rather you enter into a contract to buy or sell it. This
is an important difference to grasp. You own stocks (and other
investments); however you contract for futures.
Furthermore, because you are dealing with contracts, this means that
for every trade there must be a buyer and a seller. This is why futures
are often referred to as a zero sum trades, because there are parties
on both sides of the trade. This means is that for every dollar one
trader earns, the trader on the opposite side of the trade, is losing a
dollar.

In the Future…
All futures contracts have specific delivery dates attached. This is
why futures are referred to by the months they have assigned to them.
For example, if you are trading a March Sugar contract, this means
that you are trading a contract in which sugar is scheduled for
delivery in March.

With Specific Dates…
Because futures contracts have specific delivery dates, the
exchanges also set expiration dates for each contract. The dates
outline when the commodity is to be delivered as well as when
trading for that month ceases.

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How to Get Started Trading Futures – by Erich Senft, CTA

FND refers to the First Notice Date. This is the last day that all buyers
holding long positions1, who do not want to take delivery of the
commodity, have to exit the market. If you are in the market with a
long position after FND, it will be assumed that you will want to take
physical delivery of the commodity.
If you find yourself in the position of being long a market after FND
and you do not want to take delivery, your broker can usually make
some arrangements to get you out of your fix – but it is a hassle and
there are usually penalties and extra fees involved.
LTD stands for Last Trading Day. This is the last day that all sellers
holding short positions2, who do not want to make good on delivery,
have to exit the market.
As with the FND, if you are in the market after LTD it will be assumed
that you are going to supply the commodity when it comes due for
delivery.
Again, if you make a mistake and find yourself in a market after LTD
your broker can probably help you out; however it is not a pleasant
situation to be in and is best avoided.
As an aside, you normally want to exit your contract when there are
about 2 – 3 weeks remaining on it. After this time the market
becomes “thinner” as traders exit in anticipation of expiration.
Fewer traders could mean difficulty exiting at a good price; therefore
it is best to avoid the rush and plan to leave the market earlier rather
than later.

1
2

If you are long a market you are a buyer.
If you are short a market you are a seller.

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How to Get Started Trading Futures – by Erich Senft, CTA

The Cost of Doing Business
Unlike stocks where you actually buy the stock you are interested in,
in futures you need to put up a deposit in order to be able to control
that contract. These deposits are known as margin and
maintenance and are established by the exchange on which the
commodity trades.
Margin
Margin is the initial amount of money you must deposit with the
exchange in order control one futures contract. If margin for corn is
$540 that means you must deposit $540 for each contract of corn you
wish to trade. Therefore if you wanted to trade two corn contracts you
would need to deposit $1080 with your broker, three would require
$1620 and so on.
Because margin is a deposit and not a cost, you receive the margin
back when you close out your trade (less losses, commission and
brokerage fees).
Maintenance
Maintenance is the minimum amount of money you need to have in
your account in order to keep control of your futures contract.
Maintenance is normally less than the initial margin amount. If margin
for corn is $540 and maintenance is $400, this means that you need
to have at least $400 in your account for each corn contract you
control.
If your account balance dips below the maintenance requirements,
you will get a phone call from your broker requesting that you deposit
more money into your account. This is known as a “margin call”. If

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How to Get Started Trading Futures – by Erich Senft, CTA

you are unable to maintain your margin (the maintenance amount)
then you will be forced to liquidate your position(s).
Margin and maintenance amounts are not fixed and can fluctuate
depending on the behaviour of the commodity. While this does not
happen often, if a particular commodity is behaving wildly, then it is
not uncommon to see exchange raise the margin and maintenance
requirements.
This is the exchange’s way of protecting themselves and other
traders by making sure there are enough funds available to cover
larger price swings.
Likewise if a volatile market begins to settle down, the exchange may
decide to reduce the margin and maintenance amounts.
To determine the current margin/maintenance requirements for the
commodity you are interested in, consult your broker or check the
website of the exchange on which the commodity is traded.

Contract Size
Since futures are contracts, the size of the contract is also known in
advance. The contract size is fixed and is predetermined by the
exchange.
For example, in the corn market, each futures contract represents
5000 bushels of corn. This is a pretty standard size for many of the
grain markets. Wheat, oats and soybeans are also traded in 5000
bushel lots.
Cattle, Hogs and Pork Bellies are traded in 40,000 lb contracts, but
Feeder Cattle are traded in 50,000 lb contracts. Heating Oil and

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How to Get Started Trading Futures – by Erich Senft, CTA

Unleaded Gas are traded in 42,000 gallon contracts but a Crude Oil
contracts are for 1000 barrels.
Contract sizes can vary between markets so be sure to check with
your broker for the particulars of the commodity you are interested in
trading.
Tick Size Does Matter
Commodity prices rise or fall in minute increments loosely called
“ticks”. Depending on the market, a tick might represent a price
movement in cents or points.
The easiest way to determine your profit/loss for your trade is to take
the number of ticks the market moved during the day and multiply it
by the price per tick.
To determine the tick value for any commodity begin by taking the
contract size and dividing by 100 cents to get the dollar value per
cent. Then divide the result by 100 points to get the dollar value per
point or tick.
For example, the Swiss Franc market trades in 125,000 SF per
contract. Therefore to get the dollar value per cent you would need to
divide 125,000 by 100 cents (per dollar). Therefore, the value of a
one cent move in the Swiss Franc is $1250.3
Each cent in the Swiss Franc is also made up of 100 points per cent.
So to arrive at the value per point, or tick, you need to divide $1250
by 100 points (per cent). This would give you a point value of $12.50.4
Therefore, for each point the Swiss Franc moves in your favour, you
3
4

125,000 divided by 100 = 1250
1250 divided by 100 = 12.50

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How to Get Started Trading Futures – by Erich Senft, CTA

have earned $12.50. If it manages to move a whole cent, or 100
points, you have made $1250. If it moves two cents: $2500, and so
on.
This method of calculation works the same for all commodity
contracts. Fortunately however, many charting software applications
automatically display the point/tick value for you, making calculating
profit and loss much easier.
Buying – Going Long
Most new futures traders are quick to catch on to the concept of
buying long. When you buy a market (called going long), you are
expecting prices to rise. This is similar to the old stock market
strategy of “buy low, sell high”, and intuitively makes sense.
For example, let us say that July Soybeans are trading at $12.60 per
bushel and you expect that prices are about to rise. Therefore you
would call your broker and buy (long) March Soybeans from 1260.
(Sometimes it is easier to delete the dollar and cents, as it is only the absolute price we
are interested in).

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A few weeks later the market rallies and prices go higher to 1370.
This represents a 100c per bushel price increase in soybeans and
each cent is worth $50. Therefore, if you offset your position at this
point, you would profit $5000 per soybean contract (100 cents x
$50/cent = $5000).
Selling – Going Short
While buying commodities at a lower price and selling them at a
higher price makes sense to most people, the concept of selling a

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market, known as shorting, is foreign to most new traders and can be
a little more difficult to grasp.
Selling a market is easier to understand if you keep in mind that you
are dealing with contracts and not the actual commodity itself. You
never own the underlying commodity; rather you only contract to buy
it, or sell it (ie. supply it), as the case may be.
Therefore if you thought prices were going to fall, you could enter into
a contract to supply the commodity at one price, hoping that prices
would come down, so that you could buy it back at a lower price and
profit from the difference.
For example, it is middle of May and you think that the Cotton market
is topping out. July Cotton (that is cotton which is due for delivery in
July) is currently trading at 88 cents per pound, and you think prices
are ready to come down; therefore you could sell the market and
contract to supply cotton at 88 cents.
You call your broker and tell them you want to short July Cotton from
88.00. Remember, it is only May and you will not have to “supply” the
cotton until the contract comes due in July; therefore you have that
long to hopefully make a profit.
If the price of cotton drops, as you suspect it might, you can buy back
the cotton you’ve already committed to supply, at a lower price (offset
your position) and profit from the difference!

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Therefore, if you sell July Cotton at 88.00 and a few days later the
market falls off to 82.00, which is a difference of 6 cents or 600 points.
Each point in Cotton is worth $5; therefore this move has earned you
$3000 per contract. - (600 points x $5/point = $3000)

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Chapter 3
Tools of the Trade
Now that you have a basic understanding of how the futures market
works, it is time to get a little more in depth and take a look at what
you will need in order to begin trading.
There are essentially three things required to trade:
1. money
2. an account with a brokerage
3. charts and/or market information

Money
The number one ingredient required for trading is money, and lots of
it. The lack of capital is the number one reason that traders fail at
trading. When it comes to starting capital, more is definitely better.
Many new traders enter the world of futures trading terribly
undercapitalized. Unfortunately most people know, or have heard of,
somebody (usually a friend of a friend of a friend) who struck it rich in
futures with only a few hundred dollars start up money. Naturally they
think this will happen for them also.
While it is certainly possible, don’t count on it. Futures are highly
leveraged and this means that small moves can amount to either big
profits or big losses.
Furthermore, not having enough money to trade with can severely
limit the markets you are able to follow. Even the most modest
commodity markets usually have margin requirements around $500
per contract. And while margin is technically a deposit, the fact

How to Get Started Trading Futures – by Erich Senft, CTA

remains that you still need to put the money “up front” before you can
trade.
More importantly however, not having enough money will make it
impossible for you to ride out the “rough” spots that will inevitably
come your way as a trader. Losses are a part of trading. They can not
be avoided and you should prepare for them. The key to successful
trading however is to keep your losses as small as possible while
keeping your profits as large as possible.

How Much Money?
So how much money is enough? Well that depends on how much
you can afford to lose.
Seriously.
You should only trade futures with pure “risk capital”. If you don’t
know what that is, risk capital is money that you could put into a
paper bag and throw into a raging fire and only feel a little regret for
doing so.
Never, ever, trade with money you can not afford to lose. This means
you should never trade the mortgage money, grocery money, your
children’s college fund or your retirement savings, in hopes of striking
it rich trading.
One thing I can guarantee is that if you do, you will almost certainly
lose that money. Making you aware that trading futures is a “high risk”
venture is not just a regulatory requirement, it is a fact.
Only trade with money you can afford to lose without it severely
impacting your lifestyle. This is very important and can not be
overstated.

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Besides, trading with purely “risk capital” makes it much easier to
make clear decisions about your trades, which will be nearly
impossible to do if you were trading with money you needed to live on!

Start Up Money
Generally speaking, you should begin with no less than $5000. This
should be your absolute minimum. While $5000 is a lot of money, it is
not a lot of money in the futures world. In fact, starting with $5000 will
put you at a bit of a disadvantage and will require astute money
management on your part to make it grow.
With a $5000 account you should concentrate on trading the smaller
agricultural commodities and other lower margin markets. These
markets are usually less volatile and can be traded with less money
at risk.
Having $10 – 20K in risk capital is much better. This amount of
money will allow you to follow most markets, and in many cases trade
multiple contracts. With careful money management you should be
able to endure several smaller losses without having it adversely
affect your account.

Rule of Thumb
As a rule of thumb, you should have no less than $5000 or 5 times
the margin requirement of the contract you are considering trading –
which ever is greater.

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This means that if you are considering trading a market like corn,
where the margin is $540, having a $5000 account is the bare
minimum you should consider trading with.5
But if you were interested in trading Cotton, where the margin is
currently $2400, you should have no less than $12,000 in your
account.6

Choosing a Broker
Whether you ultimately decide to go with a full service, discount, or
electronic brokerage when choosing a broker you need consider
more than just the commission price.
When considering a broker you should first consider the brokerage.
Does the brokerage have a good reputation? Have there been
problems with other clients that have not been resolved?
The NFA (http://www.nfa.futures.org) acts as the Better Business
Bureau for brokerage firms trading in US markets and you can
contact them to find out if there are any black marks on the record of
the broker or brokerage you are considering using.
Secondly your broker should show proficiency for his craft. Some
brokers specialize in one market and others have more general
knowledge. Some can relate better to day traders and others to
position traders. Some love to do spreads; others are whizzes at
option trades.
Whatever the case make sure they know what they are talking about,
and that they will be able to help you with the types of trades you
intend to do. In fact a good broker will try to find out what your trading
5
6

540 x 5 = 2700. However $5000 is greater than $2700; therefore you should start with $5000.
2400 x 5 = 12,000. Because $12,000 is greater than $5000; you should start with $12,000.

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style and objectives are, but either way, don’t be shy about asking
questions from your prospective broker to make sure they know the
subject of trading inside out.
Asking questions of your potential broker at this point should help you
weed out the brokers from the “salesman”. Not all people who work at
brokerages are brokers. Some are little more than salesman with little
or no trading experience.
The main job of the salesman broker is to “churn you” which is a
cryptic way of saying they try to get you to trade more often. After all,
the more you trade, the more money you generate for the brokerage;
however this strategy will usually have the inverse affect on your
trading account.
Lastly, you have to have a good report with your broker. You have to
like them. You have to feel that they have our best interest at heart.
Don’t lie to your broker. You should feel that you can ask them any
question you want without feeling “dumb”.
If the only trading education you’ve had is Ken Robert’s or Larry
Williams, don’t try to hide it from your broker, chances are he can see
you coming anyway. While your broker is technically your employee
they should also be your “friend”.
One of the best analogies I have heard is that a broker is like a
golfer’s caddie. Ever wonder why all those professional golfers have
caddies? Well, a good caddy does a lot more than just carry the
player’s bag all afternoon. While the final decision is always the
player’s, a good caddy will help the player develop their overall
course strategy as well as helping with club selection, reading the
greens, etc.
I’ve heard it said that if an amateur player had the assistance of a
caddy they would immediately take 6 - 10 strokes off their score

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without doing anything else different. This is how much of a difference
it can make to have an expert on your staff to help you choose the
right clubs, read the greens, etc. A winning caddy is not cheap
however. A good caddy typically earns 10% of the player’s winnings.
Tiger Woods’ caddy is a millionaire.
Does this mean that brokers know where the market is heading next
and you should subject your opinion to theirs? No, it does not. In fact
I do not know of one good broker who pushes their opinion on their
clients, but don’t ignore the help that a good broker can provide to
you, especially if you are just starting out.
No matter whether you ultimately decide to trade with a full service,
discount or on-line broker, take your time choosing a good
broker/brokerage. While it does not guarantee success it is just one
more thing that can help diminish the odds of failure.
Indicator Warehouse recommends Mirus Futures, you can get more
information by clicking here.

Commissions
Broker commissions will be one of your biggest expenses as a trader.
Compared to stock market commissions, futures commissions are
quite high and are usually quoted round turn and per contract.
Round Turn is the phrase used to describe the cost of getting you into
and out of your trade, and is how most commissions are quoted.
Sometimes commission rates will be quoted “per side” to make them
sound more reasonable. If the commission rate is per side you will
need to double it to get the round turn rate.
Commission rates will vary depending on the type of service the
broker has to provide for you. While brokers want your business, if

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How to Get Started Trading Futures – by Erich Senft, CTA

your trades require more of their time, they will have to charge you
accordingly.
Simple electronic trading, where you do everything from planning the
trade to executing the order yourself, can be done for as little as $10
(or less) round turn per contract.7
Broker assisted trades, where you tell the broker where you want in,
where you want out, and leave the execution of the order to him, can
usually be had for about $35 round turn per contract.
The more broker intensive trades, where you may have your broker
adjust your stops, as per your plan, or where you work through the
trade with your broker will normally run you $40 – 60 round turn per
contract, again depending on the amount of work involved.
Not so long ago one brokerage was charging its new clients the
exorbitant fee of $100 round turn per contract! While these rates were
bordering on criminal, since the brokerage catered primarily to new
traders, and most of them did not know better, they subsequently
paid the ridiculous rate.
As a rule of thumb, your commission rate will roughly approximate the
amount of your account you will pay in commissions over the year.
Therefore if the commission is $35 round turn, you will approximately
pay 35% of your account to your broker.
While commissions shouldn’t be the deciding factor, you can see that
they do add up. Don’t be afraid to shop around. There are plenty of
brokers and brokerages to choose from.

7

$10 round turn in the electronically traded markets, $20 round turn in the open out-cry markets.

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How to Get Started Trading Futures – by Erich Senft, CTA

Market Information
The last ingredient you will need in order to trade commodities is to
have access to market information. Market information usually comes
in two forms: market reports and charts.

Market Reports
Market reports are available through the various government
reporting agencies that have to do with the commodity markets.
These reports are usually free and can even be emailed to you if you
subscribe to the mailing list.
The USDA http://www.usda.gov is the branch of the government
responsible for compiling and publishing these reports. The Economic
Research Service http://www.ers.usda.gov and the National
Agricultural Statistics Service http://www.nass.usda.gov/ are two of
the more popular commodity reporting sites under the USDA.

Charts
If you are going to be serious about trading you should really consider
getting a subscription to a decent charting service.
NinjaTrader charts are competitively priced and you can download
the software for free here:
http://www.indicatorwarehouse.com/services/free-ninjatraderdownload/
Go here for fast NinjaTrader data feed:
http://www.indicatorwarehouse.com/services/fast-ninjatrader-datafeed/

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Fundamental vs. Technical
There are essentially two approaches to trading futures: fundamental
analysis and technical analysis.
Fundamental analysis has to do with studying market conditions and
trying to interpret how these will affect the market. Fundamental
traders normally follow market reports quite closely and have a good
working knowledge of the market.
Generally speaking, fundamental traders who are not trading in the
pits have a longer market outlook and are not too concerned with the
daily fluctuations in price. For this reason, fundamental traders
normally have “deeper pockets” which enables them to ride out minor
market swings.
Technical trading has to do with chart analysis. There are hundreds
of different technical trading systems that have been developed over
the years to try and predict what the market might do next.
Technical traders believe that all relevant market information is
contained in the price on the chart and therefore fundamental
information is redundant.
Technical traders usually base their decisions on past events, or
predictable market formations as portrayed in the charts. Generally
speaking, technical traders focus on a shorter time frame than their
fundamental counterparts.
Most new traders are attracted to the technical side of trading. While
the fundamentals might “make sense”, learning to decipher market
reports and accurately interpreting market conditions can take years
of experience to master; technical trading, on the other hand, can be
learned in a relatively shorter period of time.

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Day Trading vs. Position Trading
Most traders can be roughly divided into two groups depending on
their trading time frame: day traders and position traders. It is
important to note that one time frame is not better than the other as
there are pros and cons for both. The question of “which is best?”
really boils down to the individual trader’s preference and abilities.

Day Trading
Generally speaking, day traders only trade during the day and rarely
hold positions overnight. In order to day trade you need live data to
be able to follow the market throughout the day.
Day traders normally try to capitalize on smaller market moves that
occur during the trading session. Day traders have to be able to make
quick decisions and therefore many day traders trade electronically
because they need to be able to enter and exit the market as quickly
as possible.
Because their positions are closed out before the end of trading, day
traders normally have lower margin requirements than position
traders. Typically the exchange will only require 30% of the regular
margin in order to day trade a market.
Not all markets lend themselves to day trading however. Day trading
works best in the more volatile markets, like Bonds or the S&P where
the market will move enough during the day to make trading it
worthwhile.

Position Trading

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Position trading is the term used to describe everything other than
day trading. Position trader’s duration of trading varies in length;
however most position traders will hold their trades for a few days to
a few weeks. Some long term position traders may hold their trades
for several weeks, or even months, but these are usually the
exceptions and not the norm.
Position traders normally try to capitalize on larger market moves
than day traders do. Most people who work during the day, or trade
part time, are position traders.
As a rule, most position traders are not able to, or do not have the
inclination to watch the market tick by tick during the day. Because
their focus is on a longer time frame, position traders are not usually
as rushed to make decisions as their day trading counterparts. Many
position traders will use brokers to execute their orders; although
some prefer to use electronic orders as well.

How to Pick Markets to Trade
Choosing the right markets to trade will depend on your account size
as well as your trading style. If you have a larger trading account,
more markets will be available to you. Likewise you will want to focus
on a different group of markets if you are a day trader than you would
if you were a position trader. Lastly, choosing markets to trade will
depend on how much time you have to follow them.
The more money you have in your account, the more markets will be
available to you. If you are trading with a $5000 account there is no
point in becoming familiar with a market like Crude Oil that has a
margin of $3375 per contract!
Assuming that you are a smaller trader, you will be most interested in
the lower margin markets like the grains, some of the meats, maybe a

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How to Get Started Trading Futures – by Erich Senft, CTA

metal and a currency or two. I would suggest you limit your scope to
about 6 - 8 markets, as these will be enough to track on a daily basis.
Even real money traders rarely follow more than 8 markets...it just
becomes too cumbersome, as you will find when you've got more
than one paper trade going at a time.
If you don't know which markets to choose I would suggest you
consider the following:
Corn, or wheat - these are good markets for traders of all levels, but
especially the beginner. The margin is not too high and the markets
normally act predictably and trend well. Corn and wheat have a
tendency to move together (but not always), so watching both can be
redundant.
Cocoa - a good market to make money in as a small move can add
up to good profits. Also can be a good market to lose money in for the
same reason. I don't mind cocoa, although I know people who have
sworn it off. This is the time to find out if it is for you...when it doesn't
cost you real money.
Sugar - a good market because it is easy to get in with minimal risk;
however the abundance of support and resistance can make it
confusing to new traders. I have a definite “love/hate” relationship
with this market.
Live Cattle - a decent meat market. Some new traders avoid the
meats entirely because of their ability to make huge ranges. Cattle is
the "safest" of the meat markets.
Cotton - can be a good market, but is capable of making large
ranges. I used to avoid cotton like the plague, but have become
fonder of it in recent years.

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Soybeans - the Pork Bellies of the Grain complex. If soybeans are
too volatile for you consider trading one of the bean cousins, like
soybean oil, or soybean meal. They tend to mirror soybeans, but are
generally lower margin and less volatile.
Silver - I like the metals; however gold can be a little rich for the small
trader. Silver mirrors gold - the poor man's gold. Some people like
copper, but I consider it too thin and margins too high for small
traders.
Canadian Dollar/Australian Dollar - two of the more reasonable
currency markets. The margins are lower, but there is excellent
money making potential. All the currencies have a tendency to move
in the same direction anyway (opposite the US Dollar) so it doesn't
really matter.

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Chapter 4
Papertrading 101
Your first step in becoming a trader is to hone your skills. Fortunately
you can simulate trading without risking real money by paper trading.
Most traders are anxious to trade and hurry through paper trading
only to get killed in the markets. Don't skip this part of your education
– it is important.
To begin paper trading, fund your imaginary account with exactly as
much money as you intend to begin real money trading with. Many
charting programs and brokerages will have simulated trade tracking
software otherwise you can track your trades using a notebook.
Now that you have a paper account and a mix of markets to trade you
need to begin searching the markets for trading opportunities. Once
you have found a trade you like, write down your entry, your exit and
your profit target. This is your trading plan.
If you are dealing with a broker, you can call and ask them if your
paper order had been filled on a particular day. Alternatively you can
look at the charts and figure it out for yourself.
Allow an extra two ticks on your fills and exits as this will simulate
slippage. Don’t forget to deduct your commissions and brokerage
fees. Use $40 round turn per contract if you don’t know what your
commission will be.
Track your trades day by day, keeping a journal of your profits and
losses. Be sure to note what you did right, what you did wrong and
what you would do differently the next time.
Paper trade as much as you can – because it’s free and will help you
determine how many markets you can comfortably handle. See how

How to Get Started Trading Futures – by Erich Senft, CTA

well you can do, but be honest. Cheating here will not help you in the
future.
Don’t leave your trading for a few days and come back to the charts
and say “if I had exited back here I would’ve made a nice profit” if you
did not exit your paper trade at that point. Remember, this is a dry run
for what you will be doing when you trade for real, so treat it that way!
I'm sure you've heard it before, but nothing changes when you begin
trading with real money. If you can not make money paper trading
then chances are you won't make it with real money either.

How Long to Paper Trade
Some educators claim that you are ready to begin trading real money
after three months of paper trading, but this can be a dangerous
measure to use as a guide.
Gaining proficiency in anything is not usually measure in terms of
time, but rather results, which is why I normally suggest people track
the results of their first 100 paper trades.
Tracking 100 paper trades will give you a much better idea of you
abilities than trading for three months. Obviously it is a simple matter
to determine your winning percentage after a 100 trades by merely
adding up the winners to arrive at a number.
You should not be trading at less than 50% accuracy and preferably
as high as 60 – 75% accuracy before you consider trading with real
money.
Simply having winning trades is not the only part of the equation
however. You also need to make sure that your winners surpassed

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your losers and that you would have come out ahead in your trades;
otherwise you are not ready to trade for real yet.
While I understand how difficult it is to curb your enthusiasm I urge
you to paper trade as long as possible. Sure you will see several
market moves that you “could’ve made a killing” but bear in mind that
the markets have been around for a very long time and they will still
be there when you are READY to trade.
I have seen too many traders enter the arena before they are ready
to trade, anxious to make their fortune. Unfortunately they quickly
became market fodder because they did not have enough
“experience”. Please, don’t let this happen to you.

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Chapter 5
The Basics of Money Management
Reward vs. Risk
Not all trades are equal, some trades are better than others and not
all trades are worth taking. Knowing which trades are the best ones to
take is the difference between success and failure.
One of the best ways to find the better trades is by analyzing the
risk/reward ratio of each trade you are considering. There are three
ingredients required to determine the risk/reward ratio (RRR):
1. Entry Price
2. Exit Price (Stop Loss)
3. Profit Target
The first two variables, the entry and the exit, are used to define the
risk portion of the trade. The difference between your entry and your
profit target determine the reward part of the equation. Of the two
halves, managing your risk is the more important of the two.
Minimizing your risk exposure is paramount to becoming a successful
trader, so don’t take it lightly! In fact the smaller your trading account
is the more important good risk control becomes. The good news is
that through the use of stop loss orders you have control over your
risk exposure.8 Learning to structure your trades properly, with
minimum risk, will go a long way towards your success as a trader.
As a rule you would not want to consider a trade that is offering less
than a 2:1 risk/reward ratio. This means that if you have $250 at risk,
8

There is no guarantee that you will exit the market at your stop loss especially in a quickly moving market.

How to Get Started Trading Futures – by Erich Senft, CTA

the potential reward for the trade should at least be $500. This is the
bare minimum return you should expect from a trade.
This should be obvious. If you do not have the potential to earn more
than you are risking, then it will not be too long before you have
busted your account. You need to tip the odds in your favour as much
as possible when trading and the best way to do that is by
concentrating on the trades that offer much more than you have at
risk.
Ideally you want trades that offer a 3:1 RRR or better. In other words,
if you have $250 at risk, the potential reward is at least $750+. Some
traders feel it is unreasonable to expect this much from the market;
however with good entry and exit placement it is possible to structure
a low risk/high reward trades on a regular basis.

The Best Piece of Advice Ever
This could very likely be the best piece of trading advice you will ever
receive. In fact, if you do not learn anything else about trading, this
one tidbit of information can protect you and make it more likely that
you will be on the “right side” of your trades.
What is this miracle piece of advice? Simply put, it is to make the
market prove you right before you ever enter the trade.
So important is this concept that you should write it down somewhere
in big letters so that you can not miss it when you plan your trades:
MAKE THE MARKET PROVE YOU RIGHT BEFORE YOU GET
INTO THE TRADE.
How do you make the “market prove you right”? Fortunately, this is
not as difficult as it might first seem. You make the market prove you

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right by placing your entry order beyond a resistance barrier that the
market must overcome before your order is filled.
This resistance barrier might be a price level where the market has
formed support or resistance, it could be a moving average line, a
trendline or it could simply be the high/low of the previous day. The
point is you need to make the market come to you whenever possible.
Entering a market this way will put you on the right side of a trade
more often than not. Making the market come to you is inline with the
other concept that you often hear me preach about which is to
develop a scenario for the market to fulfill before entering your trade.
You see, most people are under the misconception that you have to
predict where prices are going next in order to successfully trade the
futures markets. This however, is only half the story.
While it is “important” to forecast market direction, it is more important
to develop a plan that ONLY gets you into the market IF the market
behaves as you expected it to. If the market does not perform as you
had hoped, then you are not in the trade. Sure, you might end up
missing a move or two, but more importantly, you are not losing
money if the market is not doing as you planned.
While there will be times when you will try to enter the market early
and therefore can not wait for the market to “prove you right”, such as
when you are trying to capitalize on a market pullback or short term
reversal, you should attempt to structure your trades to make the
market come to you whenever possible.
By and large, if you try to structure your trades in this way, so that the
market has to come to you before your order is filled; you will have
taken a giant step towards improving your chances of becoming a
successful commodity trader.

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Trading Real Money
Congratulations! You’re ready to begin trading real money. You’ve
funded your account and paper traded your brains out. You’ve
developed some consistency in your trades and have at least made
money on paper – now it’s time for the real thing.
A couple of words of advice as you enter the exciting world of futures
trading. First off, realize that while paper trading can help prepare you
for trading, it is not like real trading. Your emotions are bound to run
much hotter when you’ve got your hard earned money on the line.
With that in mind, try to trade for real exactly as you paper traded.
Remember, with the exception of you emotions, nothing really
changes when you begin trading with real money. If you were
aggressive with your paper trades, then you should not begin trading
conservatively; and if you were conservative with your paper trades
this is no time to become aggressive.
Secondly, don’t be afraid to take profits. There is nothing like profits
to help build your confidence, and your trading account. While you
may sometime miss out on a larger move, banking consistent profits
will do more to build your account than catching the odd big move.
Besides, those “once in a lifetime” moves have a tendency to come
around every couple of months or so in the commodity markets. Just
make sure you’re still around to take advantage of one.
If you find that you run into trouble as you trade real money, don’t
hesitate to take a break and go back to paper trading until you work
out the problem. If you need time to reassess your abilities, take it.
It’s been said a hundred times before, but the markets aren’t going
anywhere!

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Trust me; I’ve been around long enough to know it’s true. If there was
ever a business where there is another excellent opportunity just
around the corner, futures trading is it.
Best of luck to you! Please do not hesitate to contact me if I can be of
assistance to you.

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About the Author
Erich Senft is a registered Commodity Trading Advisor (CTA) as well
a market analyst and teacher, specializing in teaching people the
intricacies of trading the markets.
Erich’s love of teaching, and ability to
explain trading concepts in a clear and
concise manner, has made him a popular
instructor among new traders and industry
professionals alike. His trading manual,
weekly newsletter, nightly updates and
special trading reports have long been
praised for being thorough and easy to
understand by traders of all levels.
To learn more about trading support and resistance, the manual,
nightly market updates or the free Big Weekend Edition, go to the
Support and Resistance website or write
[email protected]
Erich lives in the Pacific Northwest with his wife, a dog and two cats.
When he's not teaching or trading you can usually find him on the golf
course chasing a disobedient little white ball.