How to Trade Futures: Platforms, Strategies, and Pros and Cons
Speculators are traders who enter the futures market, not to hedge, but to profit from price changes. Many speculators borrow a substantial amount of money to play the futures market because it’s the main positioning based on the prior day’s range way to magnify relatively small price movements to potentially create profits that justify the time and effort. If you plan to begin trading futures, be careful because you don’t want to have to take physical delivery. Most casual traders don’t want to be obligated to sign for receipt of a trainload of swine when the contract expires and then figure out what to do with it. With speculators, investors, hedgers and others buying and selling daily, there is a lively and relatively liquid market for these contracts.
Go long or short
While each side is taking a risk that the price they pay now is close to the actual price at the settlement month, each party insures against the risk of a wide swing against them in oil prices. Hedgers, such as producers and consumers of commodities, can use futures in an attempt to fix prices, stabilize revenues or costs, mitigate the risk of price fluctuations, and add predictability to their businesses. For example, a farmer might sell wheat futures before harvest to secure a price, while a food manufacturer might purchase wheat futures to lock in raw material costs.
Main benefits of futures trading
Say the S&P 500 index recently broke out to a new all-time high, and we want to fade the move, hoping to book profits on a retracement to the initial breakout area around $4,720. Our money management rules stipulate that we risk no more than 1% of our futures trading account on any one trade and our broker requires a margin of $12,000. Whereas with other investing strategies, margin requirements for long and short positions differ, with futures contracts, the margin is the same for both without additional requirements. However, futures trading does come with higher risks and isn’t well-suited for beginner investors. Due to leverage, which means using debt or borrowed money for trading, investors risk losing more money – profits are amplified, but so are losses.
Because interested parties can harness futures to speculate on the future prices of so many different assets, a beginner’s guide to investing in foreign currency futures contracts can be used to help construct a highly diversified portfolio. In futures contracts, leverage is used to amplify the potential returns from changes in the price of the underlying asset. It is a double-edged sword that can significantly increase potential profits and potential losses.
The intricacy and unpredictability of futures markets can present risks to inexperienced traders. Illiquid futures markets increase volatility, which can make it challenging for brokers to execute trades at expected prices. If one wheat futures contract includes 5,000 bushels, and it sells at $12,50 per bushel, it is worth $62,000 of wheat, meaning that you would need less than 5% to trade it. As brokers set them, they can also adjust them, and the maintenance margin is primarily based on volatility. The maintenance margin for that same contract is $1,400, which is set by the broker and is a required minimum on your account at all times.
Retail Traders
This team of experts helps Finance Strategists maintain the highest level of accuracy and professionalism possible. Standardizing these details ensures that all participants know precisely what they’re trading, promoting liquidity and transparency. Many, or all, of the products featured on this page are from our advertising partners who paypal stock has 65 million reasons to own it for 2021 compensate us when you take certain actions on our website or click to take an action on their website. Leverage magnifies returns, so it can be a major benefit when you’ve earned a profit, but can wipe you out quickly in the event of a loss. An online broker usually provides all the necessary information on their website, but it is still a worthwhile idea to speak to your broker first to verify it.
- Futures also facilitate price discovery and ensure a more transparent trading environment.
- When someone says “futures contract,” they’re typically referring to a specific type of future, such as oil, gold, bonds, or S&P 500 index futures.
- When traders or companies enter a futures contract, it obliges them to sell or buy the underlying assets at a set price and date in the future.
- Institutional investors include professional asset managers, pension funds, insurance companies, mutual funds, and endowments.
Advantages and Disadvantages of Futures Trading
The futures markets are regulated by the Commodity Futures Trading Commission (CFTC). For example, you might hear somebody say they bought oil futures, which means the same thing as an oil futures contract. When someone says “futures contract,” they’re typically referring to a specific type of future, such as oil, gold, bonds, or S&P 500 index futures. Futures contracts are also one of the most direct ways to invest in oil.