Future trading is all about purchasing, selling and transacting the prices of what lies ahead in financial markets. It is one among the derivatives that allow a trader to trade an asset in the premeditative state.
The prices here are distinct from the current time and date. The market in futures runs on assumptions based on critical analysis of the present situation and other factors.
Also, futures are a known day trading market that features an overabundance of entities for the aspect of the trade. It inherits commodities, stocks, forex, and other assets. Let us known about the dynamics below.
Some basics of Future Trading
In future, the transaction of underlying assets takes place that is irrespective of the current market rates and their expiry. The futures are sans inhibitions applied on stock markets. Buying, short-selling, only selling at anonymous times, is possible in a futures trading while day trading.
The process of future trading initiates through futures contracts, which is a medium to transact. It is a deal between a buyer and a seller who reach a conclusion and agree to trade on a specific price.
There are an array of underlying assets that get sold on indices. For understanding the phenomena better, an example can help. Suppose in April; someone applies to buy Gold through a future contract for September.
It would mean that the person will purchase a fixed amount of quantity at that price during the September expiry. Here, if the seller agrees to sell the Gold at the decided price, the deal gets inked.
Once the stipulated time gets over, anyone who invests can get the product in the physical form. But it is a long-term process and requires patience. Not many people wait that long and exit when a breeze of movement comes.
Also, it requires lots of funds, and producing that in quick succession is not a cake-walk. On the other hand, if things turn out in favor of the day-trade, it can eclipse several bonuses.
However, some people have enough funds and vision to see through the future. They make scalable investments and take risks.
So, even if the futures do not trade as per desire, they take the physical stock into account. This time, they find different markets like wholesale and retails for selling them.
Day trading in futures
Usually, a day-trader depends heavily on fluctuations or quick movements for making profits. But it doesn’t happen in every derivative form of trading.
Some days are good, some are average, and others may not go as planned at all. We are Explaining it by an illustration.
If traders put a stake in silver while it trades at Euro 500/kg and sells it at 501/kg, they end up taking advantage. However, it needs attention on the part of the trader as not all the time things may work around them.
There are times when the market seems good but the future plummets. In that case, day trading requires watchful eyes.
Leverage and risk in futures
Advantages and risks have a co-relation. Both are available in abundance when the involvement of money is there. One of the biggest reasons why people choose futures is because of its leverage ability.
People have a chance to put a stake in their favorite commodity or forex or stock with slight investments. With less amount of money, leveraging technique aids to earn good profit.
But here comes a twist, if the trader does not have enough money to recover, then the losses can be gigantic.
During leveraging, a trader gets the exponential amount of underlying assets through a contract. It is a popular method to mint quick money in a few moments. Although risky by all means.
How to keep track?
The question is fundamental but has a high relevance when it comes to future trading. To keep track of the investments, a trader has to monitor the market from the very moment of putting out the funds.
But before beginning to trade with it, one needs to open two distinct accounts. One account to comply with the needs of the futures trades and see the underlying assets.
The other is for the payment of the brokers a trader is working in the market. Future brokers have their needs met at the same time while working for the welfare of their clients.
There can be a minimum deposit of Euro 300-400 sometimes to help a person begin in the stream.
Another valid question that needs intervention is the total margin one should have to crack the code for opening the futures account. Initially, one should have a high margin to start. But after that, one won’t need to maintain a low profile and margin.
Also, the need for margins vary on the kind of trade or contract one wants to float in the market. For renowned indices, on e-mini contracts, are generally high and may require some patience from traders’ end. Also, there may be possibilities that the margins can go low in the forex exchange trade.
But this is not it, in many cases of future, some contracts are easily manageable and affordable for even small investors.
Though, at the same time, the leveraging rate here is on the lower side. And subsequently, the price of profit will go down too.
Although, for beginners, there cannot be a better way to kick start their journey in the world of commercial trade. On a serious note, it is a business that requires steadiness, steel nerves, and capital for investment.
Planned capital pumping
One cannot fix a plan in the hush-hush of the futures contract. It is a volatile derivative where the trader needs the adaptation of what is happening around. For earning profits, it is better to calculate all the permutations and combinations.
Future contracts give liberty to investors to make random predictions based on their ability and analysis. It is a democratic process, where everyone can indulge on a personal level and make their speculations. It may not go their way; that’s a different story. If someone buys the contracts, they have to wait for some time before it shows true colors. And if it goes down the actual price of the purchase, the trader will find losses.
On the other hand, if it shots-up at the end of expiration, then the owner is bound to make profits. However, there are no reasons to hold it long for a trader. There is always a chance to offset it before the time and book the benefit.
The difference that arrives on selling two future contracts is good enough to pay to the broker. One can settle it in the broker’s account. Though the possibility is there that the market can roll down and so will the prospects of people. As mentioned above, the losses can be more significant.
Speculators are people who evaluate the market through instruments and tools of the trade. These people perform in-depth analysis to reach the actual conclusion.
If they predict it, then making an early exit to mitigate the visible loss is mindful. The offsetting positions help in arriving at the logical end and seeing there is no loss.
There is a catch; the settlement of funds will happen after the contract expires. So, if during that time, things alter and the futures trade higher, in that case, the seller won’t get the advantage.
But it is better to settle for less than wait for the market to submerse the trader in the sea of losses. If the price of the underlying entity is below the price buying price, in that case, the owner gains, else losses magnify.
Trade on margin
Future Trading is an art, and if a person is smart, he/she would prefer making a deal on a margin. It can work in creating a trader to take a long position in comparison to the amount resting in a broker’s account.
But here’s a twist, it is a double-edged sword. Chances of profit-loss are equal. So, the risk may fetch both denominators.
Suppose, a trader has Euro 8000 in the broker’s account, and he’s in a position to trade gold for Euro 75000. If the price moves in the favor, a terrific bonus is in the making, otherwise heavy losses will occur. In such a situation, the trader may receive a call from the broker to average it.
Check for hedging
Hedging is one way to control the risk posed by too much fluctuation or movement of the market. By doing so, it can prevent potential or inevitable losses due to undesirable ups and downs. It is beneficial to both the buyer and the seller. Offsetting and hedging are tools that are acceptable modes of compensation in the market.
Do Futures trade the entire day?
The question comes up persistently in the minds of investors, precisely who are new in the field. So, such traders should know that digitally, they can access and transact for twenty-four hours a day irrespective of the seating capacity.
Types of Future Trading
The classification of the derivatives is necessary to understand the versatility of the concept along with the complexity. The focus area of futures is more massive, broader, and more prominent than most perceive it.
Futures in equity
Someone associated with indexes of the world stock exchanges knows the importance of future trading in these waters. One can speculate the designated price and if they can get it right, the day gets made. The contracts try and check the behavior of the market on an array of indexes all over the world. It is an attempt which can switch like a pendulum without any preconceived notion.
Although global future trading hours may differ. For checking it, one will have to make efforts by reaching out to the local authorities of the stock exchange. The online broker can come in handy while assisting the trader. It is available when you wake up.
Future in Energy
Fuel channelizes the Earth in a loop and manages all the functionality that happens all around. The energy trade in futures and set the price for the world to purchase it in the physical form. Natural gas and crude oil are among the most used and viable energy forms.
Know about future index
The index future cares to know about stocks for a stipulated time. It checks the prices of shares and changes in them over a period. Selecting stocks happen here of similar companies, and construction takes place based on them. The size, standard and other elements are some of the consideration that goes into it. Every index exhibits and represents different segments of the market. Hence, it covers and tracks all the motions and fluctuations in the market. Most of them get regarded as blue-chip shares or leaders of the pack of stocks.
Duration of future contracts
A contract is an agreement among different parties, who decide it for several months. Futures contracts have durations of one month, two months, or three months. They are near, middle, and far respectively.
The expiry month is the contract month. And there is always a chance to revive or re-introduce it. After the date of expiry, one can avail of the new contracts.
Size of contracts
A contract in the derivatives market requires more than one share or a bunch of them to start. The determination of its size happens when an exchange takes place. And it is different from the other every time.
Some of the basic anecdotes in a futures contract are here
- Currency in which the contract got inked
- Quality of substance or good that involves the contract
- Unit of the currency
- For settling down the trade or physical delivery
- Quantity of the underlying asset
Points to Ponder
Understanding the dynamics of future trading cannot happen in a few hours or by reading a few snippets from articles. It requires an academic and practical study or work in the market.
Lots of things go behind the back door. To check and balance those aspects, and then evaluate them is a huge task. So, the devotion of time is what a futures contract needs from a trader.