Futures Trading: from A to Z

Futures can be used both for the effective hedging of other investment positions and for speculation. This carries the potential for good leverage gains. Before you start trading futures, you should be prepared as theoretically as possible. In this post, we have prepared for you a complete description of the futures and important aspects of working with them.

How does the futures market work?

Futures are one of the oldest derivatives contracts. They were originally designed to allow farmers to insure themselves against changes in the prices of their products between sowing and the time when the crop is harvested and brought to market. Today, the futures market has expanded and now includes contracts related to a wide range of assets, including precious metals, industrial metals, energy, bonds, and stocks.

How are futures different from other financial instruments?

Futures have several differences from other financial instruments:

  • The value of a futures contract is determined by the movement of something else – the futures contract itself does not have “innate” value.
  • A futures contract has an expiration date, after which the contract ceases to exist, unlike stocks.
  • Many futures traders, in addition to creating direct bets on the direction of market movement, use more complex trading, the results of which depend on the relationship between various contracts.
  • Use of leverage.

Leverage

Leverage means that the trader does not need to put up 100% of the contracts value amount when entering into a trade. For example, the investor buys 10 contracts in order to initiate a position, and with the x10 leverage he is able to buy 100 contracts. In short, leverage grants exposure to larger positions without the need for funding the position upfront.

Futures Market Categories

There are many different industries. While the mechanics of trade for each industry remain the same, the nuances of major industries and enterprises vary widely. Same thing with futures. All futures contracts are similar, but futures contracts track such a wide range of instruments that it is important to be aware of existing categories. For a better understanding, it is useful to compare the categories of futures with industries in the stock market and each futures contract with the stock.

Types of Transactions in the Futures Market

At the simplest level, you can buy or sell a futures contract with the expectation that the price of it will rise or fall. These types of transactions are familiar to most stock market investors and are easy to understand. Thus, direct buying and selling is probably a good idea to start trading futures. Having made some progress in futures trading, you probably want to use some of the more sophisticated futures trading methods.

Preliminary market analysis

In order to choose a futures contract for speculative trading, it is necessary to conduct at least a cursory analysis of the current market situation. Currently, the most popular methods of researching the current and forecasting future market situations are fundamental and technical analysis of the market.

  • Fundamental analysis of futures – aims to study a variety of micro and macroeconomic indicators that could potentially affect future prices of futures contracts. Since the futures price has a strong correlation with the price of its underlying asset, all the factors that can somehow influence the supply and demand balance with respect to the underlying asset are investigated.
  • Technical analysis of futures – carried out exclusively using price charts. In his work, he is guided by the main postulate of technical analysis: the price on the chart already includes and reflects absolutely all those factors that can affect it in one way or another.

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