How do we start trading futures?
Trading futures, you have several different ways open to you to trade currencies and a futures contract is one. Let's take a look at what futures trading is.
First let's start by taking a look at what the futures market is.
The futures market is essentially a wholesale market trading a wide range of commodities such as everything from gold to sugar, crude oil to pork bellies and yes those currencies that we love to trade and a whole lot more. Again a high percentage of the trades made in this market are speculative. In other words traders are speculating on the price of their chosen commodity going up or down in the future without ever taken delivery of that commodity. SO you will never have to worry about what you will to do with 1000 head of cattle when they turn up on your doorstep. It's a legal contractor a commitment to buy or sell that commodity at a fixed price and on a fixed date.
In the late 1870's in Chicago USA, a central dealing centre was opened to bring together both farmers and dealers to help legalize the system of trader in order to give the farmers assurance of price and the dealers quality of product. Over the years this has developed into contracts being drawn between both sides which were set at a specified time in the future. For example a dealer would agree to buy a certain amount of say park bellies from a farmer in October of the following year for a set price.
As with all things it didn't take long for people to realize that futures trading would be a great opportunity to make some money. A trader does not have to hole the actual commodity just the paper contract for that commodity and as long as he/she closed that contract before its expiration date then the trade would remain a paper one. These speculative traders don't have any connection with the commodity which they are trading they are only trying to make a profit of its rise or fall. They are making an investment.
One of the greatest appeals of the futures trading is high leverage. This means that to buy or sell a futures contract worth $50,000 the trader will need to have a much smaller proportion of that in an account to cover the trade, maybe as little as $5000 depending on the contract. Because of this the trader stands to win big but remember that futures’ trading with leverage is risky.
The margin is the amount of money in your account required to hold a futures contract, it's not a deposit but a form of security. If the market goes against you, you will stand to lose some, all, or maybe even more then this original margin. If the market goes in your favour then you will make a profit and your margin is returned to you.
An example of a trade would look like this.
Let's say you bought a June pork bellies for $3.20
One pork bellies contact is 5000kg's.
Therefore for every 1 cent move in the price of a full size pork bellies futures contract up or down is $50.
The Price rose to $3.25 so you decide to sell.
The difference between the buy and sell was 5 cents.
So you have made a profit of 5 cents multiplied by $50, or a $250 move in your favor.
Commissions and fees would be payable on both the buy and sell positions.
Also remember, had the price fallen, and you sold the corn at $3.15, you would have lost 5 cents, a loss of ($250) and you still would have to pay the commissions and fees on top of that.
While trading futures, it is possible to execute trades several times a day and on different contracts.
In Conclusion:This is just a brief example of how trading futures works. This in no way explains all the details of trading futures so please remember trading is risky and you should only risk capital you can afford. Always start with a demo account, have a working trading strategy and money management parameters in place.
Return from Trading Futures to Forex explained.