I recently saw the following post on an investment forum. I thought it would be an interesting topic for my newsletter. So here is my long answer:

Question: Is the risk factor of investing in commodity futures greater or lesser than that in funds?

Answer: Generally speaking the risk of trading futures is greater than investing in funds. I stress the word “generally” here as futures are not riskier all of the time.

Consider trading in futures versus investing in Madoff’s fund. Before the scandal broke, pretty much anyone would agree investing in futures would be riskier. In hindsight of course, the opposite is true.

Scandal and fraud aside, there is the issue of control. With trading futures (or actively managing your own investments of any type), you have control of what you money is doing. One reason I have never been a fan of managed funds is you really have no idea what the individual manager is (or managers are) actually doing day to day, except maybe in hindsight.  

If you are invested in a fund, your money is also at risk of key staff leaving or taking leave. All funds will have ways of dealing with this, but it is still a risk to the investor.

With futures you know where you money is at all time because you control it.

Another issue is flexibility. With futures you are free to buy and sell whenever the market is open. This way you can adjust you market exposure virtually instantaneously.  Some funds have limitations on when you can take your money out, waiting periods and so on. Not having flexibility is a risk.

Another point relating to risk of futures trading is that risk is very much dependant on how you go about trading futures. A statistic you’ll often hear in book on futures is 80 to 90 percent of people lose trading futures.

I cannot say whether or not that number is true, but in my own past as a broker, trader and adviser, I have seen a lot of people lose money because they approach trading without a plan or without the right information.

I have never flown a helicopter and I bet if I tried without the proper lessons and tools, it would be a short lived hobby. The same goes with trying anything new including trading futures. You need the right tools and the right approach.

What tools and what approach? The answers to these vary from person to person. I started out trading outright futures positions, and then I moved into options. I’ve even written a few books about options trading. I love the flexibility of trading options. You can create any type of position you like once you know how to.

I also trade futures 'spreads'. That is, I trade the value of one futures contract versus the other based on certain information. I have found this style of trading to be significantly less risky than trading outright positions. Plus it is in fact one of the most reliable trading methods I have come across.

I have written an ebook about futures and spreads and this method of trading. You can download it on my site when you sign up to the free newsletter (in the right hand column). Go to www.ProTraderDigest.com.

By the way, I have just started updating this ebook and plan to charge for it soon. I don’t expect to keep it as a freebie for much longer. So please download it – and email me with any questions or suggestions. I'll be happy to help you out.


Regards,
Guy Bower

Disclaimer: There is a Risk of Loss in Futures Trading
DISCLAIMER HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. THE RISK OF LOSS IN FUTURES TRADING CAN BE SUBSTANTIAL. YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PAST PROFITS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THERE IS A RISK OF LOSS IN FUTURES TRADING.THE INFORMATION CONTAINED HEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, HOWEVER IT CANNOT BE GUARANTEED AS TO ACCURACY OR COMPLETENESS, AND IT IS SUBJECT TO CHANGE WITHOUT NOTICE. IT SHOULD NOT BE ASSUMED THAT THE SEASONAL PRICE TENDENCIES SHOWN HEREIN OR THAT THE SUGGESTIONS REGARDING THEIR USE WILL BE PROFITABLE OR THAT THEY WILL NOT RESULT IN LOSSES. PROTRADER LLC, ITS MEMBERS OR EMPLOYEES ASSUME NO LIABILITY IN CONNECTION WITH THE USE OF THE INFORMATION CONTAINED HEREIN.