Setting Yourself Up For Futures Trading

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I've noticed that many people new to trading are a bit confused about the mechanisms of setting up and funding a trading account with a broker. You need not be, if you can manage internet banking, then establishing and operating a trading brokerage account is a snip.

The first step is to find your broker. As a trader, you are looking for an efficient electronic platform that lets you manage your account and trading activity interactively over the internet. A few things to look for include:

  • Low cost of execution for the contracts you intend to trade. Prices are either quoted as a "round trip" or "per side". As a future trade involves two separate transactions – Buy to open, Sell to close, or vice versa – a "round trip" price covers both sides. If you see an advertisement for $ 5 per side, you know that a trade will cost you $ 10.
  • Fast execution of the orders you enter. By "fast" I mean virtual instant execution of market orders. The trading platform must provide a direct electronic interface to the market. Do not entertain any two stage system where orders are submitted to brokers who then submit them to the exchange.
  • Support for all common order types. At the very least, you should be able to enter market, stop and limit orders. If you do not want to be tied to the screen for the full session, you should have orders such as "one cancels other" or "one triggers other" available, so that your strategy can be automated.
  • A chart is the trader's basic tool for analysis and good brokers supply excellent packages as part of their offering. You should be able to display market information in multiple formats and time frames. The package must support the display of common indicators and studies on the charts.
  • Real time data feeds are vital to the day trader. You should be able to watch your charts updating on your screen in real time. You should also be able to see "market depth" information. (This shows the number of orders resting in the market at various bid / ask levels.) In general, there is a monthly charge for this service, which is often waived if you make a certain number of transactions.
  • Access to international markets. The move to electronic markets has enabled brokers to provide direct interfaces with changes around the world. As well as the US Markets, you want to be able to trade European and Asian markets. This is particularly important for non-US based investors.
  • 24-hour support service is essential. Most of the time you will never need to contact your broker by phone, conducting all your normal trading activities via the internet. But if something does go amiss, you want to know that there is somebody available to fix your problem immediately. In fast moving markets, time can be of the essence.
  • Last, but not least, it is useful if your trading platform allows you to trade futures options as well as pure futures contracts. As your trading developments, you may want to utilize option strategies and it is frustrating if that means you have to change your broker.

During my career I have used two futures brokers – Xpresstrade and Interactive Brokers. Both provided excellent service. Xpresstrade uses a browser based trading platform which means that you do not have to download any special software onto your computer. I found it simple to use, with powerful features, and the support was first class.

Interactive Brokers (IB) is my current broker and I am pleased with their offering. Everything is automated, and there are a multitude of different facilities available on their trading platform. For example, orders can be entered through a conventional order entry screen, directly from a "book trader" screen, or by using graphic tools directly on the charts.

IB has excellent support services. However, they cater for the knowledgable trader and are not into "hand holding" support. A beginner may find their interface more confusing than some others, like Xpresstrade.

As an indication of prices you can expect, Xpresstrade charges $ 5 per side for common electronic contracts; IB charges $ 2.40. Both offer discount structures for volume traders.

As I type this I am following the Corn market at the Chicago Board of Trade. Click here to see my simple trading screen.

I have two windows open. On the right is the charting window set to follow the session using 2 minute candlestick bars, with volume shown along the bottom. It is easy to display studies, or draw trend lines on the chart.

To the left is the "book trader" window which displays market depth at various price levels, and permits one click entry of all common order types. For example, left clicking a particular price level enters a Limit order, and a right click enters a stop order. Buy / Sell buttons at the top of the screen enter immediate Market orders.

This is a great setup for day trading. Screens are easy to customize; So each trader can have their own setup, according to personal preference and the tools they like to use.

I have noticed that new non-US traders sometimes feel relevant to open accounts with US brokerage firms. Naturally they feel more comfortable and "connected" working with a brokerage based in their own country.

But I advise you to think internationally in this business. The US futures markets are big and the industry servicing them is well established and sophisticated. Look for the "best" brokerage, not necessarily a local one. Remember that your interaction will be totally web based, so it really doesnt matter where their office is.

Another fear I have heard expressed by new offshore traders is that their money is not secure, or may be difficult to access. All that I can say is that in over ten years trading experience I have found depositing and withdrawal funds to be simplicity itself, and absolutely reliable. US futures brokers are strictly regulated, possibly better regulated than brokers in your own country.

The best brokers provide facilities on their website which completely automates the account application process. Be prepared to spend a bit of time on this because because there are several documents to be read and completed. It can be a bit intimidating the first time you do it; There is a lot of boilerplate ensuring that you understand the nature of various risks involved. You are also asked questions about your assets and prior trading experience. It is important to read this material carefully, but avoid becoming too discouraged by all the legal language – the brokers need to advise you of all worst case scenarios and, naturally enough, ensuring that they can not be held responsible for losses incurred during normal trading Activities.

Soon soon after submitting your application form you will (hopefully) be advised by email of your account acceptance and provided with details including User Id and Password. Login and change the password as soon as possible.

An offshore trader using a US brokerage has a couple of extra steps to go through. You must fax (or email scanned copies of) your passport and a utility bill to comply with stricter security regulations since 9/11. You will also be asked to fill in a W-8 form for tax purposes. If you have no other business activity in the US and live in a country which has reciprocal tax agreements, completion of this form means that the brokerage does not have to withhold a percentage of profits for taxation purposes. This simplifies matters, because you only need to declare income and pay taxes in your own country.

Once you have a user account and password, you can log into your account. At this point you need to fund it. This is normally done by a standard electronic funds transfer. Offshore traders may need to wire funds, but this is a simple thing to arrange from your bank branch. (In my case, Interactive Brokers provide the facility to deposit funds using the standard Australian funds transfer system which is easily done via internet banking.When the funds arrive in your account, it is activated and you can view your balance on the screen. You trade, the balance is updated in real time.

Normally there is a facility on the secure web site to set up details of your bank account. Having done this once, you can withdraw funds whenever you wish with just a few clicks of your mouse.

That is all there is to it. Following these few simple steps sets you up with a brokerage account providing access to markets throughout the world, with software facilities which were once the exclusive province of large investment houses.

Now you are ready to start playing the trading game!



Source by David James Bennett

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