What About Instruments?

We noted during our discussion of the different markets that there are a variety of ways to trade them. Many markets have both a cash component and some kind of leveraged instruments available. Stocks, for example can be traded straight up in terms of the shares (cash market) as well as through options and futures in some cases (leveraged markets).

When you make the decision which market to trade, you have to also decide in what fashion you will trade that market. In some cases you have no real choice. Trading commodities, for example, means trading either futures or options on futures. That’s really the only way an individual trader can participate in that market. It’s not as though you are going to transact in physical bushels of corn.

Markets like stocks, though, provide a wider array of alternatives. You need to make your decision on what you trade based on not just the market you want to target, but also your knowledge, understanding, and comfort with the instruments involved. Some people are just not comfortable with the leverage futures and spot forex trading require. Others have no problem with it at all. It is entirely a personal decision.

With a handle on risk and the market you are going to be trading, we can move ahead with the discussion. In the next chapter we start looking at the way you should trade.

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