Trading Futures
While many people have heard about futures, not many people know what makes up a future and what's involved in trading
these contractual agreements. Unless you are actually
immersed in the world of finance and stocks, the term future sounds less risky than many other parts of the stock market.
However, unless you possess a type A personality, trading futures can be anything but a walk in the park.
Some experts feel that the only true way to completely understand future exchanges is to immediately immerse yourself in trading low to moderate futures. This way you can seek first hand the pros and cons. While you could overload yourself about futures to the point that it won't make you a better trader, you should have a basic grasp of the pointers below:
1. Futures operate as an agreement in a contract. A trade commission, such as the Chicago Trade Commission, approves these contracts. This allows you purchase a commodity at a specified time in the future, at a price agreed upon at that moment. Basically, the contract states that you will purchase a commodity at a set price on a certain date.
Common commodities are gold, interest rates, agriculture, currency, and stock indexes. Some people end up trading the contract to someone else prior to the closing date. The commodity itself is not sold until the closing date. When the future is sold, you are hoping your commodity is sold to the real market for a higher price than you bought your future. Hence, you end up with a profit.
2. Future's terminology is a bit confusing and extensive.
CBOT stands for the Chicago Board of Trade exchange where futures are traded. Two groups purchase futures:
speculators and hedgers. Speculators are mostly the common person who is speculating a future price and wants to buy
futures at a lesser price right now. However, hedgers are
mostly businesses that buy the future to make sure commodities can be sold at a certain price and no less in the future. Some futures are bought with puts or calls. A put means the buyer anticipates the price in the real market may go down, so he puts a set price on the minimum that the future can be sold down the road. However, a call means the buyer is anticipating the price to go up later on and expects to sell the future at a better price later on for a profit. Via put or call, both buyers ultimately hope to make a profit.
3. How are your math skills? Futures are more strategic than many people realize. The buyer or seller doesn't expect the market to fluctuate greatly from the purchasing price of the future. In fact, many buyers and sellers research their market and have a good feel for which way their commodity is headed. They look at fundamental analysis (supply and demand) and technical analysis (market trends and price chart patterns) to find an equilibrium price.
Due to the complexity of the market, many traders say you can't truly gage your trading until you give it a try. Your personality also plays into your ability to be a good future trader. You shouldn't expect to succeed on the first try.
Thus, if loosing money is not your thing, you shouldn't take this risk. The market may be volatile, so you may want to start out with low risk futures like Eurodollar or options market, buying at a premium (where the price can not go lower than what you paid).
Futures trading is a complicated matter that is often glossed over by many a layperson. However, with some guidance and after trying a few exchanges either with a trading group or online, you may discover its benefits and thrill.
these contractual agreements. Unless you are actually
immersed in the world of finance and stocks, the term future sounds less risky than many other parts of the stock market.
However, unless you possess a type A personality, trading futures can be anything but a walk in the park.
Some experts feel that the only true way to completely understand future exchanges is to immediately immerse yourself in trading low to moderate futures. This way you can seek first hand the pros and cons. While you could overload yourself about futures to the point that it won't make you a better trader, you should have a basic grasp of the pointers below:
1. Futures operate as an agreement in a contract. A trade commission, such as the Chicago Trade Commission, approves these contracts. This allows you purchase a commodity at a specified time in the future, at a price agreed upon at that moment. Basically, the contract states that you will purchase a commodity at a set price on a certain date.
Common commodities are gold, interest rates, agriculture, currency, and stock indexes. Some people end up trading the contract to someone else prior to the closing date. The commodity itself is not sold until the closing date. When the future is sold, you are hoping your commodity is sold to the real market for a higher price than you bought your future. Hence, you end up with a profit.
2. Future's terminology is a bit confusing and extensive.
CBOT stands for the Chicago Board of Trade exchange where futures are traded. Two groups purchase futures:
speculators and hedgers. Speculators are mostly the common person who is speculating a future price and wants to buy
futures at a lesser price right now. However, hedgers are
mostly businesses that buy the future to make sure commodities can be sold at a certain price and no less in the future. Some futures are bought with puts or calls. A put means the buyer anticipates the price in the real market may go down, so he puts a set price on the minimum that the future can be sold down the road. However, a call means the buyer is anticipating the price to go up later on and expects to sell the future at a better price later on for a profit. Via put or call, both buyers ultimately hope to make a profit.
3. How are your math skills? Futures are more strategic than many people realize. The buyer or seller doesn't expect the market to fluctuate greatly from the purchasing price of the future. In fact, many buyers and sellers research their market and have a good feel for which way their commodity is headed. They look at fundamental analysis (supply and demand) and technical analysis (market trends and price chart patterns) to find an equilibrium price.
Due to the complexity of the market, many traders say you can't truly gage your trading until you give it a try. Your personality also plays into your ability to be a good future trader. You shouldn't expect to succeed on the first try.
Thus, if loosing money is not your thing, you shouldn't take this risk. The market may be volatile, so you may want to start out with low risk futures like Eurodollar or options market, buying at a premium (where the price can not go lower than what you paid).
Futures trading is a complicated matter that is often glossed over by many a layperson. However, with some guidance and after trying a few exchanges either with a trading group or online, you may discover its benefits and thrill.
