Trading Futures

Are you looking for training on how to properly trade futures? If so, this article will give you a good grasp on the basics of futures.

When you trade a future, you are giving an order to buy or sell a commodity on a given date in the future. So, if it is June, you may speculate on the prices of a commodity in July or August.

When you are trading futures, you are essentially executing a contract whose cost is whatever it will be worth when it is delivered at the later date. The price of buying the contract typically equates to 10% of that total. This is called the initial margin.  So, if you had a $20,000 contract, the initial margin would be $2,000.

The future will go into an exchange clearing house with other orders where sellers are paired with buyers in an automatic process. Depending on the value of the future which changes over time, the clearing house will mark the price to market, or, ‘marking to market’. Since the true value of the contract is higher than the initial margin required, the sways in your account can be dramatic.

When the sways occur, you are required to keep your margin consistent. So, you are required to add money if the price of the contract drops. The margin must be met to give the clearing house confidence that you will meet your terms of the contract.  To protect from large sways in the price, the market has price limits and there are other maneuvers available such as spread trading.

Spread trading is when you buy a future to buy and another future to sell the same commodity at the same time. With this tool, you can protect your downside risk but your rewards are also limited. The gain in this play is the ’spread’, or, the difference between the purchase price and the sales price of the contracts.

The primary function of futures is to stabilize market prices. While speculators trade futures solely to create profit, hedgers are primarily interested in protecting themselves from price increases (if they are buying) or price decreases (if they are selling).