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Opening an account
Once an aspiring commodities trader has decided on a suitable broker, or has decided to go it alone, the next step is to open an account. The paperwork is fairly simple and straightforward, and the broker will be more than happy to help with it. The forms to be filled out serve two essential purposes: to ascertain whether the individual is financially qualified to trade commodities, and to obtain the individualТs signature acknowledging the various risks involved in trading commodities.
аIn recent years, legislation that established the Commodity Futures Trading Commission (CFTC) and self-regulation by the National Futures Association (NFA) have led to a situation in which every broker must be very concerned about the interests of the potential client. Thus, the process of establishing an account will likely include carefully worded disclaimers, which the client must sign, and a tape-recorded conversation, usually by phone, in which the broker qualifies the client by verifying the information included in the application form and determining that the client understands and acknowledges all the risks involved in futures trading.
аWhen opening an account, the would-be futures trader faces another important decision: What size account should you establish? Is $1,000 enough? Do you need $5,000? Though seemingly a simple decision, research has shown that the size of the trading account has a direct bearing on success in futures trading. The fact is that most accounts of $5,000 or less lose money. In fact, it in not until account size reaches $15,000 that the odds of success become more realistic.
аConsider the fact that the best professional futures traders rarely achieve more than 50% accuracy in their trading. In other words, most successful traders lose money on more than half of their trades. Their success lies in being able to cut their losses short on each losing enough to offset all the small losses and thus show a net profit in the account.
Once this is understood, it becomes apparent why an account of less than $15,000 is very risky. There is little room in such an account to withstand a series of small losses. Often, the account will be depleted before a profitable trade occurs. An account of $5,000 will not allow a trader to stay with a high-conviction trade through a series of short-term opposing moves, whereas an account of $15,000 might allow the investor to place a stop-loss at a point further away from the trading price, thus avoiding being stopped out of the market. Then, a losing trade can be turned into a very profitable trade.
How to Open a Commodity Trading Account
Opening a commodity trading account is as simple as filling out the application and sending in the money. It is now possible to complete the entire process on-line. But the ease of opening an account shouldnТt be confused with the trading process. While opening an account is a relatively quick and painless process (provided you meet the financial requirements), the trading experience can prove to be quite the opposite if you are uneducated or unprepared.
аYour account applications will request the standard information as well as a basic financial history. You will also be required to read various risk disclosure documents and sign a few statements indicating your awareness of the risk. Read all paperwork carefully and full out the forms honestly. Do not overstate your income; if you do, you may waive your right to effective litigation in the event that you have a future claim against the firm. Evaluate carefully whether you should be trading futures.
Financial Suitability
Different brokerage firms have different financial suitability requirements and standards. Some allow you to open an account with as little as $1,000 while others require $5,000 or more. The more money you begin with, the better your odds of success. Regardless of what the broker requires, the ultimate burden of determining suitability is your. Unless your trading capital is 100% risk capital, you are advised against futures trading.
Who Should and ShouldnТt Trade Commodities and Why
Although there are many people who want to trade commodity markets, it is evident that not all individuals are suited for such trading either financially or emotionally. Although a brokerage firm canТt stop you from trading if you have the money and financial suitability to trade, you may still be unqualified due to your lack of discipline, knowledge and/ or trading procedures. Futures trading should only be attempted by those who have risk capital and sufficient income. The brokerage firm you desire to work with will determine your suitability to trade since requirements can vary considerably. (How the Futures Markets Work, Jake Bernstien)
