Futures Trading
Futures
Trading - People who have no knowledge about futures contracts wonder,
"What is futures trading?" Most of them think that it involves
extraordinary financial risk and wealthy people. Though the two things
often go hand in hand, this is not the case with futures trading. So,
what is meant by trading futures? Futures are contracts to deliver a
particular amount of commodity on a certain specified date in future.
Some of the commodities which are normally traded include agricultural
commodities like soybeans, wheat, rice or metals like copper, zinc,
gold, or currencies.
Trading futures is entirely different from
many other types of investing because a person who trade futures is not
required to own or buy the commodity. A trader has to make his trading
decision by speculating on the movement of price of a commodity in the
near future. For example, if the trader believes that the price will
move upwards, he will buy the commodity. Similarly, if he anticipates
that the price will fall, he will sell the futures contract. If his
prediction holds true, he will profit from the trade. On the other hand,
if his speculation turns out to be wrong, he will incur loss.
A
large portion of future contracts is traded by speculators; most of them
liquidate their trading position before the expiry of the contract
either making profits or incurring losses. In such a transaction, it is
not the responsibility of the investor to deliver the commodity.
Speculators play a vital role in the economy because they trade in
bigger volumes which affect the price movements of commodities, and thus
the economy. Hence, it is necessary to monitor trading volumes to get a
clear picture of the price movements. Moreover, speculators make it
easier for people who take actual delivery of the commodity to plan for
the future. The real buyers and sellers feel comfortable knowing that
there is always someone available in the market to buy the contract when
the contract is being sold or sell the contract when the contract is
being purchased.
However, trading futures is a long-term learning
process. If you wish to trade futures, open an account with a reputed
futures broker who has a good track record. Choose the commodity you
wish to trade. And keep an eye on the market to determine price
movements to determine your trading position. Use historical price
charts, patterns, current news and other important indicators like
moving average price and moving average convergence divergence (MACD),
to ensure that your trading position is in accordance with these
indicators.
Always check contract specifications to find out the
trading hours of the contract, contract months as well as the last day
of trading. You will gain experience when you actually trade futures. As
always, there are high chances of incurring losses, if you are a
beginner trader. Therefore, it is advisable to trade with a practice
account first in order to gain sufficient knowledge and experience
before real trading. The price movements and data available in practice
account are real-time; hence, you will gain hands-on knowledge and
experience without losing any money.
After getting acquainted
with the futures market, start with a small investment; this will limit
the amount of loss. Trade in a disciplined way and don't panic even if
you lose in a particular trade. Analyze your strategy and make necessary
changes, if any. After a period of time, you will be able to earn
decent money, and you will never wonder, "What is futures trading?" like
a beginner again.
