Futures are quickly becoming one of the most intriguing areas of the market for traders. Futures trading involves buying and selling fixed amounts of certain commodities (or securities) over an exchange. It also means making predictions. For example, if you buy a contract for a thousand barrels of oil, you’re likely not intending to take delivery of those thousand barrels. You’re making a bet that the price of oil will rise or fall so that you can sell the contract later at a profit. Making these kinds of high-risk bets can be daunting. That’s why finding a great futures broker is essential.
But how do you do that?
Keep these criteria in mind as you begin your search.
Know which exchanges your broker has access to – and which exchanges and markets you want to trade on. Most brokers have access to the major exchanges but only some have trading access to the global exchanges. If you want to trade on TOCOM or LME products you will have to make sure that your broker has access to those markets. A good futures broker will have multiple clearing relationships with several major Futures Commissions Merchants around the world.
Commissions and Fees
You’ll pay a set fee for each kind of trade you make, because each exchange has a set fee structure in place. But your broker will tack on a commission for each trade. Some will also charge you extra for providing research and data. These commissions and fees can add up, particularly if you are making multiple trades in a day. When weighing commission rates, make sure you know what a broker’s commission actually represents. If the commission is high, what is the value-add from that particular broker? A higher commission should mean excellent support, technology, and resources. Make sure that this is what you’re getting.
Breadth of Services
A good broker will also offer a wide range of services, such as commodity hedging, system trading, self-directed online trading, managed futures consultation, 24-hour trading support, and a family office/wealth management division. Some brokers can even take your own trading ideas and help you develop your own trading system.
Margin and Risk Management
One of the most attractive features of futures trading is being able to trade on margin. This means that you don’t need to have the cash to cover all your trades. Brokers essentially give you a line of credit to make up for what you may not have in cash – yet.
All brokers have to follow the overnight margin requirements set by the exchange. But when it comes to day traders, brokers have more flexibility. Many will offer a 50% discount, and some will allow you to trade on the E-mini S&P with a margin as low as $500-a-day. While it may be tempting to choose a broker with the biggest margin discounts, remember that increased leverage means increased risk for you. A good broker will want to protect you from potential disaster, and when you’re dealing with the futures market, it’s easy for things to spiral out of control. Make sure to find out how a broker keeps track of your leverage. Some even offer “risk controls” that can be placed on your account to protect you from certain trades when you are already over-leveraged.
Trading Platforms and Online Technology
Take a good look at how many trading platforms a certain broker offers. A good broker will offer multiple platforms for traders to use, depending on what they are trying to achieve. Whatever platform you need, you want it to be fast, reliable, and stable. You also must have direct access to the markets and be able to trade on your preferred exchange. If you haven’t yet determined which platform is best for you, ask the broker to recommend one. Some of these platforms may even have free trials, so you can try a few before you commit.
Research and Data Capabilities
Say you want to trade jet fuel. A good futures broker should offer you insight into how the demand for jet fuel may change in the next quarter, or trends that may increase or decrease the rate of air travel. If you’re making high-risk predictions, it can be enormously helpful to have information from industry experts. An excellent futures broker should also offer real-time data and live-charting, news reports, and keep you abreast of all major report releases.
Futures trading can attract less-than-scrupulous investors and brokers looking to make a quick profit. A good way to rule out these types is to look at how long they have been in business. Anything under seven to ten years isn’t saying much. For ultimate peace of mind, go with a broker that has at least fifteen to twenty years’ experience in future trading. Also you can check to see whether your broker is registered with the Commodities Futures Trading Commission (CFTC) or the National Futures Association (NFA.) Conduct a search on a potential broker through the Background Affiliation Status Information Center (BASIC) at nfa.futures.org.
Remember that a futures broker not only makes trades for you but can offer much-needed guidance and insight into the marketplace – help you will need, especially if you are new to trading futures. There are no guarantees in trading, but taking the time to find an excellent futures broker can only serve to set you up for financial success.