Futures Trading

Various Futures Markets:

There are a number of Futures markets globally to cater to various types of Futures contracts. Futures contracts are traded on currency, energy, metal, real estate, grains, indices, livestock, meats, as well as other food items. Some of the Futures markets in the United States are Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), Chicago Board of Trade (CBoT) and Chicago Board Options Exchange (CBOE). Globex, built by CME, is a global trading platform to enable global and continuous trading of the Futures.

Benefits of Futures Trading:

  • The Futures market is a much larger market than the stock market and hence provides a lot more liquidity. Future contracts are traded in large amounts every day. Because of that the market fluctuations are less radical than the stock market.
  • Futures trading provides higher leverage than Stocks. It can go up to 20 to 1 leverage, which enables the trader to take much higher positions. 
  • Also, Futures markets are open almost 24 hours (except the short closing for settlement) which avoids large gap ups or gap downs in the market, unlike the stock market. 
  • The commission fee is much lower in futures markets. Moreover, they are charged when the position is closed. 
  • Futures contracts can be used to hedge the risk of price fluctuations of the underlying commodity. For example, Investors can buy Forex Futures to hedge the risk of Forex investments or portfolio. 
  • Future markets are generally impartial and proficient as it is not easy to get the insider information, unlike in stocks where companies may relay information to insiders. 
  • Selling short in Futures market is a common phenomenon and the round the clock and high liquidity market makes it easier.

Trading Futures for regular Income:

  • To generate regular income by trading Futures, a trader should identify and follow the trends. If the trader researches the dynamics that influence supply and demand of commodities, then there are more chances for profitable trades. 
  • Traders pay as little as 5% value of the contract and they can sell it before the expiration date. This is an excellent opportunity to make short term income. However, it comes with significant risks too. A trader should have the right Strategy before entering into these Futures positions. 
  • Traders can invest through brokers who can take care of their portfolio. However, to cut the cost, a Trader can use online brokers and analyze the market themselves. They should include all the costs involved, such as broker fees, online subscriptions fees, printing fees etc. in the Trading Expenses. 
  • Traders should focus on a small number of Futures Markets to trade, rather than trying to time all the markets. Futures offer a variety of markets to trade in however, trading requires hard work, research, reading charts, analysis, and many more things. They should try to narrow their focus to 2 or 3 markets. If an investor is losing in one, they can offset it with gain in another.

Risks in Futures Trading:

  • Often Futures Traders use huge margin to enter into the positions. If the market goes in the direction of loss, the losses can be very high due to high leverage. 
  • There is no assurance in the futures market if there is anyone willing to buy when you are selling and willing to sell when you are interested in buying.
  • If the broker does not execute the order at the time a trader wants it to be executed, there can be a significant loss. Moreover, sometimes brokers may fill orders with higher values to make extra money.
  • Liquidating and hedging are not possible in all market conditions. If the trader is unable to hedge its position the losses may increase.
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