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As commodity futures brokers we want the investor to be successful trading the futures markets and what we have found over the years is that our most successful investors only risk 1/3 of there available margin account capital on any one trade. Beginning traders must remember that futures are highly leveraged investments and one does not need to take as big of a position in the markets to achieve the same returns one would see in a stock market investment.

Commodity futures are for the most part no more or less volatile and risky than stocks. What makes large returns and losses possible is the use of leverage. Leverage allows you to buy and sell more futures contracts using much less capital than you would have to commit to trade the same dollar amount of stocks. Therefore, the high percentage returns that this leverage allows also create a commensurate level of risk.

Margin requirements in futures trading runs about as low as 3% for some contracts, as compared to the 50% minimum margin requirement to trade individual stocks. The reason for the low margins stem from the fact that futures are contracts rather than actual assets. Therefore, you are not exchanging anything, but merely agreeing to do so at some specific point in the future. Almost all commodity speculators will offset their positions to avoid taking delivery on physical commodities. Therefore, the risk involved in the futures market is in the price changes that may occur over the life of the position, not in the actual contract value itself.

Margin functions as a guarantee that you will be able to meet the financial obligations for the trades you decide upon. If a trader has little excess margin in their account and the trade goes against them they may then be required to place more money into their account in order to hold the position.

It is important for a trader to understand the advantages as well as the disadvantages of leverage. This same leverage that can result in high percentage returns can also lead to equally large losses. In conclusion the correct money management strategy to use is to limit your losses on trades and let the winners run.