Futures Trading Blog

William Smith asked:


Futures trading is one of the most difficult concepts for novice investors to comprehend. To better understand the present of futures, it’s best to look back into the past.

Back to the Futures Part I - The Origins of Futures Trading

Futures has its roots in forward contracts. Although forward contracts date back to the Middle Ages, they became most popular in 18th and 19th century America. Way back then, farmers from across the American mid-west used to bring their grain to Chicago with each harvest.

Since there was a surplus of grain available at that one time, the stockyards were able to bid down the price paid to farmers. Then later in the year, as supplies dwindled, the stockyards would sell grain at a healthy premium.

Understandably, the farmers thought that this was unfair. Grain consumers also thought it was unfair. In the modern age, farmers and large grain purchasers can engage in futures trading in order to hedge their risks, but back then, there was no such thing as futures.

Instead, farmers and large consumers established forward contracts. In these arrangements, farmers would agree to supply a grain purchaser with an agreed-upon amount of grain at an agreed-upon price, and at an agreed-upon date and location - thus, eliminating the middleman.

Back to the Futures Part II - Why Futures Trading is Necessary

So why do we need futures when forward contracts seem to solve the problem? Well, while forward contracts solve some problems for farmers and consumers, they create new ones. First of all, there was no guaranteed way of enforcing the forward contracts.

Secondly, the market wasn’t very fluid. Prices could go up and down for little or no reason, and buyers and sellers had a hard time finding one another. Futures trading eliminates these problems.

For one, futures establishes standardized contracts. On the Chicago Board of Trade, for example, a futures trading corn contract is standardized to 5,000 bushels of U.S. No. 2 yellow corn, with delivery dates of either March, May, July, September, or December.

If a farmer wants to guarantee his price for corn, he can sell a futures contract today, and make delivery on the date specified in the contract.

Back to the Futures Part III - Futures Trading for Hedging or Speculating

In reality, few futures contracts are ever “delivered.” This means that a farmer who sells a May corn futures trading contract is unlikely to eventually deliver 5,000 bushels of No. 2 yellow corn to the Chicago Board of Trade, and the investor who buys the futures contract is unlikely to actually take possession of the corn.

Instead, people involved in futures trading typically “close out” their positions before they take delivery. For example, the farmer would most likely later buy a May contract, and the investor would most likely later sell one.

In the above case, the farmer would be using futures as a “hedge.” After all, the farmer may live hundreds of miles from Chicago, and delivery would be impractical if not impossible. In all likelihood, the farmer would sell his actual corn at a local market. His futures trading would be just to guarantee a given price.

For example, if the current price of corn were $2.40 per bushel, but the farmer feared it might drop, he could engage in futures to hedge by selling a later delivery of one contract (5,000 bushels) at $2.40 per bushel. Then, as the delivery date of the contract came near, he could buy an offsetting contract, thereby closing out his position.

If the price of corn went up, the farmer would lose money on his futures trading. If the price of corn went down, he would turn a profit, but either way, he would be hedged.

On the other hand, there are speculators. These investors aren’t participating in futures in order to hedge; they’re simply trying to make a profit. The good thing about speculators is that they help make markets more liquid.

This means that there is less volatility, and prices remain more accurate. For example, if the price of corn fell too low, speculators would come in and buy contracts in order to push the price back up. If the price of corn skyrocketed due to a short-lived panic, speculators would begin selling contracts and thus, driving the price down.

Speculators get a bad name in the mainstream media, but that’s because most newsmen and women don’t understand how financial markets work. If you’re a speculator engaged in futures trading, pat yourself on the back for doing our country and the world a great service.



GUILLOT

bankerdaz asked:


Does that refer to futures contracts? If so, when do they trade? — Obviously before the stock market opens. Rights?

SPINO

Dave Rivera asked:


How It All Began

Commodity futures trading, as we know it today, came about for the first time in Japan in the 17th century, where rice was traded in future contracts. It was a period when farmers and buyers came together and decided to commit to each other future prices negotiated on suitable terms in exchange of grain for money. For example, a dealer would agree to buy a ton of rice at the end of the next month for a certain price from a farmer. This would be ideal for both parties, as the farmer would know how much he would get for his rice in advance, and the buyer could plan to raise the money he needed for the purchase. Contracts such as these became more and more popular and common, and were even used as collateral for taking loans. If the buyer could not take delivery of the rice, he could sell the contract to someone else. On the other hand, if the farmer could not deliver the goods, then he could hand over the contract to another farmer. Thus began commodity futures trading, as we know it today.

What Are Commodity Futures?

Today, most of the futures commodity trading exchanges are set up in a similar way. Members of the exchange do the actual trading on the floor. Stock stands for equity in a public company, and can be held as long as you want, whereas commodity futures trading contracts have a specified life. In the past, people used commodity futures trading methods generally to hedge risks and fluctuation in prices, or to take advantage of them, and not for actually buying into the commodity. The idea is that a contract requires delivery of the commodity within a certain predefined time period unless it becomes null and void. The person buying the commodity futures trading contract agrees to buy the specified commodity at a fixed price on a certain date. The person selling the commodity futures trading contract agrees to sell the commodity at a certain price on a certain date. As time goes on, the contract price fluctuates, and this brings about profit and loss in the trade. It is to be noted, however that, the delivery generally doesn’t take place. The contract is usually liquidated before its expiry. The entire trade is based on the idea that there will be no delivery, but we can speculate on the price of the underlying commodity at a future time to make money. Commodity futures trading is done all over the world now.

Different Types Of Commodities

There are many types of commodities that are traded in the international market. These can be very broadly categorized into the following:

• Precious metals like Gold, Platinum, Silver, etc.,

• Metals such as Aluminum, Copper, Steel, etc.,

• Agricultural products like Rice, Corn, Oils, Cotton, Wheat, etc.,

• Soft commodities such as Cocoa, Coffee, Tea, Sugar, etc.,

• Livestock like porkbellies, cattle, etc.,

• Energy commodities like Crude oil, Gasoline, Gas, etc.



LOSSETT

Miss Yahoo asked:


A. There are no specialists on futures exchanges.
B. All futures contracts are eligible for margin trading.
C. Trading is halted for the day if the prices reach the daily limit.
D. The uptick rule applies to the shorting of futures contracts.

VIARS

Markus Heitkoetter asked:


Futures trading is amongst today’s most highly leveraged, potentially profitable financial pursuits. It allows traders to build up their trading accounts fast with only a small amount of capital at their disposal. However, if you take futures trading lightly, you could also wipe out your trading account in a matter of days. Therefore, it’s crucial to your trading success that you diligently educate yourself in futures trading, and trade only with a proven and solid trading strategy.

If you’re new to futures trading, it can be especially difficult to decide WHICH contracts to actually trade. There are a lot of options! The best approach would probably be to start with the more popular commodities, until you have a better idea of which contracts most fit you and your trading.

The more you know about the basics of futures contracts and commodities like this, the better your chances of trading success. With any type of online trading, there are a number of factors that you should take into account. Here are four of those factors, along with an assessment of how futures trading measures up:

1.) The Capital Requirements

In order to trade a futures contract, you need to deposit an initial investment into your futures trading account. Currently, brokers require a minimum of $5,000, though some brokers are willing to open an account with as little as $2,000.

2.) The Leverage

The leverage depends on the futures contract you’re trading and the contract value. Each contract requires an initial margin. Here are some examples for the most popular contracts (as of January 2008):

E-mini S&P – as low as $500 to trade a $75,000 contract

(Leverage 1:150)

E-mini NQ – as low as $500 to trade a $45,000 contract

(Leverage 1:90)

E-mini Gold – as low as $400 to trade a $27,000 contract

(Leverage 1:67.5)

3.) Liquidity

Again, the liquidity depends on the futures contract you are trading. Here are some numbers:

E-mini S&P: around 2,500,000 contracts/day

E-mini NQ: around 500,000 contracts/day

Euro Currency: around 200,000 contract/day

As you can see, the liquidity varies, and therefore you MUST check the volume of the futures market you are planning to trade.

4.) Volatility

You will find decent volatility in the futures markets. The high leverage will allow you to make decent profits, even if the markets move just a few points. Here are some average daily moves:

E-mini S&P: between 1% and 3% per day

E-mini NQ: between 1% and 2.5% per day

E-mini Gold: between 1% and 2.5% per day

Euro Currency: between 0.5% and 1.5% per day

Keep in mind that these moves represent approximately $500-$1,500 per day for each contract traded.

Conclusion:

Futures markets can be very liquid, and the capital requirements are as low as $2,000. The leverage is at least 1:50, and there’s decent volatility.

Futures markets are regulated and the spread is typically 1 tick (minimum movement of the contract). Commissions are usually below $5 per transaction. It’s no surprise that many day traders choose the futures market for their trading endeavors.



OVERBY

spicymonkey asked:


eg. nikkei futures traded on OSE, CME and SGX? or soybean meal on CBOT and ECBT?
eg. swissfranc on CME,PBOT,NYBOT? or Nikkei225 on CME,OSE,SIMEX? are the prices all the same? if different, is there room for arbitrage?

DESBIENS

hahagoodguy asked:


Wondering you know which futures brokers (preferreably discount / online ones) now carry those house index futures contracts?

Thanks a lot.

DUNNAGAN