Futures trading can be pretty complex, but if one has walked through some basics, anybody can Learn futures trading. A facility that allows any trader to trade commodities or stocks etc without actually owning the commodities. Here in this guide, we tell you about futures and also enable you to know how it is possible to go about trading them.
What is future?
A futures contract is simply a two-party agreement that accrues to buy or sell a commodity at a defined price on some future date already determined. That’s to say, futures fix the price today but have trade happen later.
For example, if one feels that the oil prices will rise next month then he or she can enter a futures contract for purchasing oil at the current prices thus ensuring a reasonable deal when the price necessarily shoots up.
Why Do People Use Futures?
Two reasons why future contracts are traded are hedging and speculation.
Hedging: Companies selling physical products, such as farmers or oil companies, use futures to hedge against price vagaries. For example, a farmer can sell wheat futures so that he is at a given price during the harvest season; he then does not lose money in case the market price falls.
Speculation: On the other hand, speculators make money through futures as a means of betting on speculation of where prices are going. They don’t have to necessarily be owners of the underlying asset; they just have to be able to hold onto the contract. If, come that later date, prices have indeed become more expensive, then they can cash it in.
How Do Futures Work?
So, it never quite reaches the mind of a newbie that, in futures trading, you don’t buy or sell the real asset, be it gold or oil. You trade contracts that represent those assets. Each contract has its set price and an expiry date. When the contract gets to its expiry date, the buyer and seller exchange the asset or settle the difference in cash.
Steps to Start Trading Futures
Now that you understand what futures are, let’s talk about trading them. Here’s how to do it in pretty simple steps:
- Understand the Basics
Before you start, you spend some time researching the future. Much more horrific would be the result if an individual entered a futures market without knowing a thing about it, how it works, the risks attached to it, and what strategies can be adopted. A beginner would begin with the most fundamental knowledge of the structure of a futures contract.
- Select a Futures Market
The next step would be selecting what market you would want to trade. You can either trade commodities like oil or gold or financial assets, such as stock indices or currencies. Choose a market that interests you and where you can find much information that might guide your decisions.
- Find a Broker
A futures broker will guide you in accessing the market and making a trade. So, choose a good broker that gives a nice trading platform and educational tools to instruct you.
- Open a Trading Account
After you select your broker, you open a trading account with them. In this account, you input some basic details, make and confirm deposits, and meet the margin requirements of your broker before trading futures with it.
- Understand the risks
Futures trading is pretty speculative, and risks are quite large. Be crystal clear about them. When you begin trading futures, prices may play against you. You may lose more than the capital you had put in initially. Trading futures certainly calls for its share of risk management. Never invest any money you cannot afford to lose.
- Begin Trading
Now you can start trading once your account is ready. If you think prices will rise, the buy order; if you think prices go down, the sell order. You have to be very vigilant of the market for letting your position expire before the expiration of the contract if you do not want to end up owning the asset.
Famous Futures Trading Strategies
There are various approaches that you can use when trading futures. Here are some of the most prevalent approaches:
- Following a trend
This method focuses on whether the market trend is in an uptrend or a downtrend. Then you enter a trade by that pattern. The proponents of this strategy believe that in this direction, the price will keep on going.
- Spread Trading
Two positions are taken simultaneously under this strategy: one long and one short position on different futures of the same asset. The idea is to benefit from the difference in prices of both contracts.
- Swing Trading
Swing traders hold positions ranging from a few days to even several weeks, capitalizing on short or medium-term price movements. The strategy suits those who do not need constant monitoring from the market but would still like to trade futures.
Advantages of Trading Futures
Futures trading has numerous advantages, as highlighted below:
Leverage: Margin trading enables one to manage a big position with very little money.
Liquidity: the futures market is very liquid; you have, thus easy entry and exit of the positions.
Risks Associated with Futures Trading
But then, be warned that futures trading bears very huge risks. Among these risks are:
Hedging Risk: It pumps up the return, but it pumps up the loss too. You may lose much more than your margin every time.
Market Volatility: Futures prices can often jump from one extreme value to another. So, sometimes you can make money fast or lose it in a flash.
Conclusion
Futures trading lets you trade based on the actions of a price and does not necessarily require ownership of any asset. Though it comes with knowledge and caution, do it slow, research the market, and always learn how to manage your risks. While you learn futures trading, you can start to get a feel for the basics and then practice with small trades before moving on to larger ones.
Properly applied, futures can be a very powerful hedging and speculation tool, an opportunity for gaining profit in multiple markets.
