Futures Trading is a form of investment which involves speculating on the price of a commodity going up or down in the future. They are all trying to make a profit by buying a commodity at a low price and selling at a higher price. Futures trading is mainly speculative ‘paper’ investing, i. To the uninitiated, the term futures currency trading can be a little off-putting but it is mainly used because, like a contract, a futures investment has an expiration date.
You don’t have to hold the contract until it expires. You can cancel it anytime you like. The expiration dates vary between commodities, and you have to choose which contract fits your market objective. For example, today is June 30th and you think Gold will rise in price until mid-August. The Gold contracts available are February, April, June, August, October and December.
As it is the end of June and this contract has already expired, you would probably choose the August or October Gold contract. Therefore, prices are more true and less likely to jump from one extreme to the other. All futures contracts are standardised in that they all hold a specified amount and quality of a commodity. Crude Oil futures contract holds 1000 barrels of crude oil of a certain quality. Futures trading evolved as farmers and dealers committed to buying and selling future exchanges of the commodity. For example, a dealer would agree to buy 5,000 bushels of a specified quality of wheat from the farmer in June the following year, for a specified price.
It didn’t take long for businessmen to realise the lucrative investment opportunities available in these markets. There are two main types of Futures trader: ‘hedgers’ and ‘speculators’. For example, if a farmer thinks the price of wheat is going to fall by harvest time, he can sell a futures contract in wheat. You can enter a trade by selling a futures contract first, and then exit the trade later by buying it. That way, if the cash price of wheat does fall by harvest time, costing the farmer money, he will make back the cash-loss by profiting on the short-sale of the futures contract.
Other hedgers of futures contracts include banks, insurance companies and pension fund companies who use futures to hedge against any fluctuations in the cash price of their products at future dates. Speculators include independent floor traders and private investors. In other words, they invest in futures in the same way they might invest in stocks and shares – by buying at a low price and selling at a higher price. The margin required to hold a futures contract is not a down payment but a form of security bond. If the market goes against the trader’s position, he may lose some, all, or possibly more than the margin he has put up. But if the market goes with the trader’s position, he makes a profit and he gets his margin back.
For example, say you believe gold in undervalued and you think prices will rise. Each Gold futures contract holds 100 ounces of gold, which is effectively what you ‘own’ and are speculating with. Speculating with futures contracts is basically a paper investment. 3 tons of gold in your garden shed, 15,000 litres of orange juice in your driveway, or have 500 live hogs running around your back garden! An investor can make money more quickly on a futures trade. Firstly, because he is trading with around ten-times as much of the commodity secured with his margin, and secondly, because futures markets tend to move more quickly than cash markets. Similarly, an investor can lose money more quickly if his judgement is incorrect, although losses can be minimised with Stop-Loss Orders.
My trading method specialises in placing stop-loss orders to maximum effect. The open out-cry trading pits — lots of men in yellow jackets waving their hands in the air shouting “Buy! Most futures markets are very liquid, i. This ensures that market orders can be placed very quickly as there are always buyers and sellers of a commodity. Commission charges are small compared to other investments and are paid after the position has ended. Commissions vary widely depending on the level of service given by the broker. Disclaimer: There is risk of loss trading futures.