Online Futures trading is complicated business, even for experienced investors, and so is shopping for a brokerage firm to use for futures and commodities trading. It’s not just about commissions and customer service.
Futures are contracts for the delivery of specified amounts of a certain commodity, on a certain date in the future. Many of the commodities involved in futures trading are agricultural, such as wheat, and orange juice concentrate. However, futures contracts for many other “commodities” such as precious metals, and currencies are also traded and exchanged.
Things You Must know
Trade in physical commodities, futures markets buy and sell futures contracts, which state the price per unit, type, value, quality and quantity of the commodity in question, as well as the month the contract expires.
Futures accounts are credited or debited daily depending on profits or losses incurred. The futures market is also characterized as being highly leveraged due to its margins; although leverage works as a double-edged sword. It’s important to understand the arithmetic of leverage when calculating profit and loss, as well as the minimum price movements and daily price limits at which contracts can trade.
The leverage in options 1:40 which is very low comparing to forex and very high comparing to stocks leverage.
How to trade Futures
Do It Yourself – As an investor, you can trade your own account without the aid or advice of a broker. This involves the most risk because you become responsible for managing funds, ordering trades, maintaining margins, acquiring research and coming up with your own analysis of how the market will move in relation to the commodity in which you’ve invested. It requires time and complete attention to the market.
Open a Managed Account – Another way to participate in the market is by opening a managed account, similar to an equity account. Your broker would have the power to trade on your behalf, following conditions agreed upon when the account was opened. This method could lessen your financial risk because a professional would be making informed decisions on your behalf. However, you would still be responsible for any losses incurred as well as for margin calls. And you’d probably have to pay an extra management fee.
Join a Commodity Pool – A third way to enter the market, and one that offers the smallest risk is to join a commodity pool. Like a mutual fund, the commodity pool is a group of commodities which can be invested in. No one person has an individual account; funds are combined with others and traded as one. The profits and losses are directly proportionate to the amount of money invested. By entering a commodity pool, you also gain the opportunity to invest in diverse types of commodities. You are also not subject to margin calls. However, it is essential that the pool will be managed by a skilled broker because the risks of the futures market are still present in the commodity pool.
How Futures Traded
Going Long When an investor goes long – that is, enters a contract by agreeing to buy and receive delivery of the underlying at a set price – it means that he or she is trying to profit from an anticipated future price increase.
Going Short A speculator who goes short – that is, enters into a futures contract by agreeing to sell and deliver the underlying at a set price – is looking to make a profit from declining price levels. By selling high now, the contract can be repurchased in the future at a lower price, thus generating a profit for the speculator.