New to Derivative Trading? Here's 5 Things to Keep in Mind

Derivatives are technically contracts between two parties. On their own, the contracts have no intrinsic value. Instead, a derivative’s price or value is based on its underlying instrument—hence the name. The underlying principle in a derivative contract is that Party A will owe Party B when the price of a certain instrument reaches a specific predefined point at a preset date.

» Learn more: Our top derivative examples in forex

1. Educate Yourself

This is an essential step before you start trading. There is surprisingly little in-depth information online about derivatives trading, so books are still the most reliable option for those seeking a solid understanding of derivatives.

Online courses are another option if you’d like to learn about derivatives trading on your own, at your own pace. There are also great courses on the topic for visual learners.

» Develop your trading skills: See our beginner trading courses and advanced trading courses

2. Develop a Strategy

Developing a trading plan and strategy is crucial to preparing to trade derivatives. Your strategy should ideally consider your risk tolerance, goals, and the type of derivative you wish to trade. Factors like:

• Economic indicators
• Market trends
• Geopolitical events should also be considered, as these can impact the market

Remember to stick to your strategy as much as possible—trading can often lead to impulsive decisions when you get carried away by emotions or rattled by market fluctuations. A solid strategy will help you make level-headed decisions during crunch time.

3. Start Small and Gain Experience

Practicing with a demo account is a great way to learn the ropes of trading. Demo accounts give you a certain amount of virtual money that you can use to trade. You won’t have to use real money, but you can get a feel of how it is to trade live on your chosen platform.

When using a demo account, however, ensure that you treat the virtual money as if it were your real funds. This way, you won’t “train” yourself into taking risks you can’t afford. Trading psychology is a crucial factor to consider. Then, you can start trading with real money—but start small and gradually build it up as you master your strategy.

» Open a risk-free demo account with Fortrade

4. Practice Risk Management

Derivative trading is a high-risk, high-reward endeavour. Profits are typically higher than in traditional stock trading, but this also means that losses can be more profound. Ideally, you should have already included your profit targets, stop-loss orders, and entry and exit points in your strategy before going into live trading.

As mentioned earlier, you need to fully understand the risks involved when trading with derivatives and understand the market and your chosen derivative.

» New to volatility? Learn the risks and advantages of volatility trading

5. Keep Researching

Lastly, because trading can often be affected by trends and current events, you should always try to do constant research. Stay abreast of relevant news, economic indicators, and market trends that could impact your derivatives’ underlying assets.

» Use MT4? Make sure you know about the best indicator for MT4 mobile

Start Your Journey

Derivatives trading involves a great deal of risk, so it’s important to have a solid strategy before going into live derivatives trading. As mentioned above, preparation, constant research, and practice will help you prepare for a rewarding derivatives trading experience.