Futures. Ideas and peculiarities
Let's start with the fact that futures are agreements, or contracts, conducted between two parties. The future liabilities they assume have to be respected on a predetermined date. There's an asset that one of the parties buys and the other sells at a predefined price under the contract.
Futures are traded just like currencies. They may involve various tools for making a right forecast of the asset's further fluctuations. Just like in currency trading, technical and fundamental analysis tools may be applied here. Trading is planned in the same way, and there arises the need for a trading strategy which sets the rules for entering into a contract, placing orders, and other activities.
So, we may conclude that a futures contract is a derivative financial instrument. It is also referred to as a contract to buy or to sell that stipulates the current market price and the date on which the seller undertakes to sell, and the buyer – to buy, an asset at a fixed price.
A variety of tools - currency, oil, precious metals, bonds, shares, stock indexes - may be an asset. The essence of futures trading is based on the price stipulated in the agreement. The trader's aim is to sell or to buy the asset in a certain period of time at the best price.
History of futures markets
Modern futures markets were preceded by centralized markets that used to solve the problem of glut or deficiency in one or another commodity in different seasons. In the 19th century, for example, grain was transported to the centre and sold cheap due to oversupply in the harvest season, while in spring it was in high demand that could not be satisfied as farmers had had to sell out the glut because of high storage costs. This helped to form a centralized market in order to regulate mechanisms of competitive trading. Futures markets stabilized risks, demand and supply with respect to any business.
Advantages of futures trading
- A trader has an opportunity to diversify trading risks at most as the choice of trading tools is almost unlimited and assets can be traded on the world's various stock exchanges.
- The range of strategies that can be used in futures trading is very high thanks to their increased liquidity.
- Futures trading commission is less than the one expected in the market of shares, which saves traders' money.
- The most seductive advantage is the fact that there's no need to pay the amount necessary to buying the assets themselves. Futures contracts are purchased on margin.
Disadvantages of futures trading
- Limited time periods (realisation periods) are inherent in forming futures agreements and make futures trading more complicated and knowledge-demanding.
- Since futures imply a use of high leverage, a trader can earn really huge money using moderate capitals. However, a loss-making trade on margin may result in losing the whole deposit.
Trading strategies for futures: profit making
So, how can one earn from trading futures at Forex? As we have already mentioned, futures contracts allow us to use various trading strategies. This is one of the futures advantages as everyone can choose their most suited trading scheme. Futures trading is similar to currency trading and the strategies are similar, too.
When it comes to making profits, everything is simple and understandable: buy a contract cheap, sell it at a more expensive price - this is the rule for any speculative operation at Forex, and futures are no exception.
Happy trading, my friends!
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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.