Futures Trading Blog

Mark Crisp asked:


Futures trading is a different type of trading in comparison to trading stocks and bonds. When you purchase stocks and bonds you have physically bought something that you own, but that is not the case with futures. In futures trading you are speculating about whether the price of a commodity will rise or fall.

For example, let’s say that you decided to speculate on hogs. If you thought that hog prices would be rising in the future you would purchase a hog futures contract. If you thought that hog prices would be falling then you would sell your hog futures contract. Whether you wanted to buy or sell, there has to be a buyer and a seller.

Investors are attracted to futures trading because it isn’t terribly complicated. In traditional stock markets there are literally thousands of stocks to choose from, whereas in the futures market there are only about forty markets to speculate on.

Another reason why investors like futures trading is because it is very easy to buy or sell futures. The futures market is affected by the extreme weather conditions such as droughts, hurricanes, tornadoes, and freezes because these can affect agricultural crops. Money can be made whether prices go up or whether prices go down. Still, another reason that futures trading is viewed so positively is that commission fees are much lower than those paid in stock trading.

The most important reason that traders dabble in commodities is because there is an enormous opportunity for big gains in a short period of time. Of course, the potential for big profits exists because there is a risk for huge losses as well. No trader should ever get involved with the commodities market with the intention of getting rich quick. Those who do that usually endure huge losses. Only take risks that you construe to be acceptable losses.

You can begin trading in the commodities market with small purchases.

The smaller the trade you make, the less that you risk. You can still make profits on small trades, but it may take you quite a long time. Gains and risks are interrelated. The more that you put at risk means that there is more to be made in gains. The trouble is that you must be able to manage your risks. No one can consistently make the right calls about what to buy and sell, so at some point you will be wrong.

Never invest more money than you can afford to lose. The other way to minimize your risk is to put a stop loss order in. The stop loss will automatically kick in when it reaches your set price and then your commodities will be sold so that you can stop the loss from getting too bad.

If you think you can handle these risks, then give futures trading a try. Just make sure you have agood, time tested, trading system and the discipline to follow it. Futures trading is like any business. There are ups and downs to contend with.



CLAFFEY

Albert Smith asked:


A lot of people these days will tell you that futures is one of the most profitable financial investment instruments. The attraction of futures trading is the fact that it isn’t too complicated. The problem with typical stock markets is that there are thousands and thousands of stocks available, and to some that might seem like too daunting a figure to deal with. With futures markets, a speculator has only a handful of markets - about forty - to choose from. Just as it is easy to choose from that handful of markets, it is also easy to speculate commodities futures because the markets are affected by extreme weather conditions like storms or droughts. A decision to buy or sell can be made within moments of a weather report broadcast, and there is always a chance for profit whether prices go up or down.

There are in fact many advantages of futures trading. For this article, we will look into 3 of the best reasons why you should consider futures trading.

Small Commission Charges

Compared to other investments, the commission charges for futures trading are relatively small, and paid only after a trader’s position has ended. The commission charges may vary, depending on the service level of the broker. Commissions involving online brokers may be as low as $5, while brokers who provide full service in terms of advice on the trades made can charge up to $50 per trade. For a broker in a managed trading commission controlling all trading decisions at his discretion however, the charges can go as high as $200 on each trade.

Paper Investment

When you purchase stocks or bonds, you actually own that particular investment, but with futures it’s a little bit different. Trading futures does not require the trader to have or own actual physical goods on hand in order to trade them, because all the trader is really doing is speculating with futures contracts. It really is just a paper investment, like an insurance policy or a monetary bet. There are no physical goods involved in the exchange, and the actual commodity in the contract that is being traded is only exchanged on rare instances when the delivery of the contract takes place. For most futures traders (who are usually speculators themselves), the trade is a paper transaction, pure and simple.

High Leverage

The fact that futures contracts are highly leveraged financial instruments means that an investor can go into the market with a relatively small investment - called margin - and potentially come out reaping large profits. The concept of investors having to pay the ‘margin’ is comparable to a security bond, whereby should the trader make a loss on his trade, he may lose some, all, or even more than what he put up. However if his market predictions turn out to be correct, he gets back his margin and whatever profit he might have made, the profit usually being ten-fold on a 10% margin. In comparison to other investments, futures trading offers an excellent return, and this is why it is one of the best advantages of futures trading.



KNUTT