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What is Futures Trading? A Complete Guide to Investing in the Future

Future trading is an exciting way to speculate on the financial markets and make a profit. Whether you’re a professional investor or a beginner, futures trading can be a great way to diversify your portfolio and potentially increase your returns.

In this comprehensive guide, we’ll take a deep dive into what future trading is, the different types of futures contracts, the different trading strategies, the platforms for future trading, and the key considerations for successful futures trading.

Introduction to Futures Trading

Futures trading is an agreement to buy or sell an asset at a predetermined price at a specified point in the future. The asset could be anything from commodities such as wheat, oil, or gold to stocks and bonds. Futures trading is typically done through an exchange such as the Chicago Mercantile Exchange (CME).

futures trading chart
futures trading chart

The most important part of futures trading is the contract. A futures contract is a legally binding agreement between two parties to buy or sell an asset at a predetermined price at a specific time in the future. The buyer of the contract agrees to purchase the asset for the predetermined price at the specified time, while the seller agrees to sell the asset at that same predetermined price at the specified time.

Trading futures can be a lucrative way to make money, but it’s important to understand the risks before getting started. Futures trading is a high-risk, high-reward endeavor, and as such, it can be quite risky. It’s important to understand all of the risks before diving into futures trading.

What Are the Benefits of Futures Trading?

Futures trading can be a great way to diversify your portfolio and potentially increase your returns. Here are some of the key benefits of futures trading:

  1. Leverage: Futures trading allows you to leverage your capital, which means you can control more of the underlying asset than you could with your actual capital. Leverage is a great way to potentially increase your returns and minimize your risks.
  2. Liquidity: Futures contracts are highly liquid and easy to trade, which means you can trade them quickly and for relatively low fees.
  3. Short Selling: Futures trading allows you to short sell, which means you can make money even when the market is going down.
  4. Low Costs: Futures trading typically has very low costs, making it a great way to potentially increase your returns.
  5. Low Risk: Futures trading carries less risk than other forms of trading because the contracts are standardized and there’s a central exchange that sets the rules.

What Are the Risks of Futures Trading?

Although futures trading can be a great way to diversify your portfolio and potentially increase your returns, there are some risks to consider. Here are some of the key risks associated with futures trading:

  1. Market Risk: The market can be unpredictable and volatile, so there’s always the risk that your trades will not pan out as planned.
  2. Leverage Risk: Leverage can be a great way to increase your returns, but it also increases your risks.
  3. Liquidity Risk: Futures contracts can be illiquid, which means you may not be able to find a buyer or seller when you need one.
  4. Counterparty Risk: There’s always the risk that the other party won’t follow through on their end of the contract.
  5. Margin Risk: You’ll need to put up a certain amount of money as a deposit, called a margin when you enter into a futures contract. If the market moves against you, the margin can be wiped out and you may need to put up more money to keep your position open.

How to Get Started in Futures Trading

Getting started in futures trading doesn’t have to be complicated. Here are some steps you can take to get started:

  1. Do Your Research: Before you get started, it’s important to do your research and make sure you understand what futures trading is and how it works.
  2. Choose a Broker: You’ll need to choose a broker to help you trade futures. There are a few different types of brokers, so make sure to research each one and find the one that’s right for you.
  3. Open an Account: Once you’ve chosen a broker, you’ll need to open an account.
  4. Fund Your Account: You’ll need to fund your account by depositing money.
  5. Choose Your Contract: You’ll need to choose a futures contract that you want to trade.
  6. Place Your Trade: Once you’ve chosen your contract, you’ll need to place your trade.
  7. Monitor Your Trade: You’ll need to monitor your trade and adjust as needed.

Types of Futures Contracts

There are several different types of futures contracts you can trade. Here are some of the most common types of contracts:

  1. Commodities: Commodity futures are contracts to buy or sell a certain amount of a commodity at a predetermined price at a specified time in the future. Examples of commodities include wheat, oil, gold, and silver.
  2. Currencies: Currency futures are contracts to buy or sell a certain currency at a predetermined price at a specified time in the future.
  3. Stock Index Futures: Stock index futures are contracts to buy or sell a certain stock index at a predetermined price at a specified time in the future.
  4. Interest Rate Futures: Interest rate futures are contracts to buy or sell a certain interest rate at a predetermined price at a specified time in the future.

The Different Trading Strategies

There are a variety of trading strategies you can use when trading futures. Here are some of the most common strategies:

  1. Long Positions: A long position is when you buy a futures contract with the expectation that the price of the asset will go up.
  2. Short Positions: A short position is when you sell a futures contract with the expectation that the price of the asset will go down.
  3. Spreads: Spreads are when you buy and sell two different futures contracts at the same time to capitalize on price discrepancies.
  4. Straddles: Straddles are when you buy or sell two different futures contracts with the expectation that the price of the asset will move in either direction.
  5. Arbitrage: Arbitrage is when you take advantage of price discrepancies in different markets.

Important Futures Market Terms

When trading futures, it’s important to understand the key terms and concepts. Here are some of the most important futures market terms:

  1. Basis: The difference between the spot price of an asset and the futures price of the asset.
  2. Margin: The amount of money you need to put up as a deposit when entering into a futures contract.
  3. Contract Size: The amount of the underlying asset specified in the futures contract.
  4. Expiration Date: The date on which the futures contract expires.
  5. Open Interest: The number of contracts that have been bought or sold but not yet closed out.
  6. Initial Margin: The amount of money you need to put up as a deposit when opening a new futures position.
  7. Maintenance Margin: The amount of money you need to maintain in your account to keep your position open.
  8. Position Limits: The maximum number of contracts you can hold of a given futures contract.

Key Considerations for Successful Future Trading

Successful future trading requires a thorough understanding of the markets, the different types of contracts, and the different trading strategies. Here are some key considerations for successful futures trading:

  1. Understand the Markets: It’s important to understand the different markets and how they work before you start trading.
  2. Choose the Right Broker: Make sure to research different brokers and find the one that’s right for you.
  3. Understand the Different Types of Contracts: Make sure to understand the different types of contracts before you start trading.
  4. Understand the Different Trading Strategies: Make sure to understand the different trading strategies before you start trading.
  5. Set Risk Parameters: Make sure to set risk parameters before you start trading.
  6. Monitor Your Positions: Make sure to monitor your positions and adjust as needed.
  7. Have a Plan: Make sure to have a plan for when and how you’ll exit a position.

What Are the Different Platforms for Future Trading?

There are a variety of platforms you can use to trade futures. Here are some of the most popular platforms:

best futures trading platforms
  • Interactive Brokers
  • TradeStation
  • E*TRADE
  • Charles Schwab
  • TD Ameritrade 

Conclusion

Futures trading can be a great way to diversify your portfolio and potentially increase your returns. However, it’s important to understand the risks involved and make sure you understand the markets and the different types of contracts before you get started.

This guide has provided an overview of what futures trading is, the different types of contracts, the different trading strategies, the platforms for future trading, and the key considerations for successful futures trading.

Now that you have a better understanding of futures trading, you’re well on your way to making informed trading decisions and potentially increasing your returns.

GENERAL RISK WARNING!

NOTE: This article is not investment advice for anyone because online trading could be a high risk for all who have a lack of knowledge & experience. 86% of traders lose money in financial markets. we are not your financial advisors who guarantee your profit at all.

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