Futures Trading 101

Posts Tagged ‘futures trading systems’

As with any trade in the market, futures trading is all about buying low and selling high.  The guesswork is not as simple as it would seem because it is actually based on a projection of future prices.

Any futures investor tries to make good predictions. He makes trading decisions based on what he thinks would happen to the price in the future.

A wise trader is quick to notice when prices fluctuate.  He always puts himself at an advantage by buying or selling just in time.  He manages to cut his losses and make some profit.

When individual and corporations transact these exchanges online, neither of them get to view the goods.  Neither of them also get to own anything tangible, unlike with stocks wherein you actually get to own shares.  Futures are more a matter of speculating on how well these goods will do in the market.

To speculate means to choose an investment even when it poses a higher risk.  Contrary to traditional trading, you are opting to risk more than the average.  It is an offshoot of having foreseen or predicted a favorable price movement.  Speculation is often accompanied by so much anticipation.  If you can wait until Chapter 4, we’ll brief you with more!

Futures trading does not necessarily have to happen on the trading floor because both the buyer and seller may not have that interest in producing or buying said goods.  For instance, agricultural goods get bought and sold over and over again in the course of trading yet they never really reach the trading floor.

Besides agricultural products, there are other types of goods involved in futures trading.  These goods are called your futures trade commodities, and they can be classified into five different types:

1. Agricultural futures. By far this is one of the largest and most basic of all futures markets.  Topping the staple goods in farming would be wheat and corn.
2. Energy futures. The global economy banks precariously on energy futures.  Think about crude oil and natural gas, and you will have the most bankable of fuel trades.
3. Currency futures. With worldwide commerce happening 24/7, most experts would agree that forex futures trading undoubtedly ranks high as the largest futures trading market.
4. Interest rate futures. Here is a steadily growing market which is becoming more aware of how money can be made from bonds and interest rates themselves.
5. Food futures. Who would argue with the fact that food is the most basic commodity necessary for human consumption?  That’s the very reason why foods as basic as coffee, milk, and sugar would also top the list of some of the fastest-moving basic commodities around.

With a choice ranging from agricultural commodities to financial commodities, no wonder the futures market is such a thriving business especially for seasoned traders.  The mere thought of all of these commodities with their potential value can be very engaging to any trader, beginner or otherwise.

However, if you are a novice who has not had much experience in futures trading, it would be advisable for you to concentrate initially on just one or two commodities.  Capitalize on those goods which are your strengths and which suit your trading style.

In order to assure yourself that you will take good risks and enjoy your career as a trader, let’s get to know the different types of futures ONE BY ONE.

In futures trading there tend to be standards in the creation of contracts, such that the terms of new contracts are based on commonly-accepted terms.  This makes the whole process easier, since the terms are usually amenable to both contracted parties and the brokers will have an easier time drawing up contracts.

These terms are slightly dependent on the exchanges market where you plan to base your contract on, as well as the commodity under contract.  For example, a wheat futures contract has a standard unit size of 5,000 bushels, and the contract months are March, May, July, September, and December.  As such, you can only set up contracts with increments of 5,000 bushels on the months mentioned above.

One of the sets of terms that varies is the grade, or quality rating of the commodities involved.  Not all countries follow the same standards for quality in their commodities.  As such, standardized tests or highly-precise specifications are necessary to ensure the quality of the commodity being traded.

Because the common terms of contracts differ per commodity under exchange, we cannot discuss them here.  There is just too much information to cover, and it tends to be quite technical.  Once you have a solid grasp of the basics, then you can read up on the minutiae of futures trading contracts.

Commodity markets are regulated by different bodies across the world.  Generally, a commodity market is governed by some government or semi-government committee overseeing the various aspects of trading in that country.  A short list of such authoritative bodies follows:

• Australian Securities and Investments Commission.  In Australia.
• China Securities Regulatory Commission.  In China.
• Securities and Futures Commission. In Hong Kong.
• Securities and Exchange Board of India and Forward Markets Commission.  In India.
• Financial Services Agency.  In Japan.
• Monetary Authority of Singapore. In Singapore.
• Financial Services Authority.  In the United Kingdom.
• Commodity Futures Trading Commission. In the United States Of America.