Categorized | Futures

What is the Futures Trading Market?


Share Button

An Introduction to Trading Futures

The futures trading market is one that has been widely grouped into options trading. While they both work on similar systems, futures trading has much more serious restrictions that we will look into later on. Though much of this industry is misunderstood, it has also provided other day-traders and swing traders with the platform to gain millions. Most of the time however, futures traders find themselves in a deep loss, which can quickly go from bad to worse. This will serve as an introduction to futures trading and the market, as there is way too much information to squeeze into one post. We’re not trying to give you a quick fix for sleep insomnia, this is to broaden your trading horizons and help you understand the benefits of futures trading.

(Photo credit to: Greekshares.com)

(Photo credit to: Greekshares.com)

So, what are futures and what is futures trading?

To put it simply futures are standardized contracts that are publicly traded through an exchange. These contracts cover an expansive amount of different forms, with commodities, stocks, and options readily available for investment in the futures platform. The futures market is generally characterized by it’s ability to use high leverage relative to stock markets. Futures trading and contracts were originally created to hedge and speculate the price movement of the underlying asset in question. To understand futures trading, there are a couple of terms you’ll need to know.

Initial Margin: This is the fee paid for the futures contract. Unlike other types of trading, futures contracts only require a fraction of the actual investment up front. Instead of paying a premium, futures traders pay an initial margin to the seller to obtain the futures contract.

Margin Call: A “margin call” is the dreadful position many futures traders find themselves in. As the price fluctuates against a party’s favor, it can cause that party to owe or settle up on their account. After a consistent trend of loss (which happens quite frequently with futures price fluctuations), the substantial debt the party owes is referred to as a “margin call.” Such events can happen very quickly in futures trading and is the number one reason why many day-traders quickly lose everything in the futures market.

Another area that has to be understood are the four different types of futures trading. Regardless of your unique strategies, innovatively diverse portfolio, or recent gains, you will also fall into one of the four categories.

Four Types of Futures Trading

Like a well oiled machine each type of future trader provides a specific function in the larger spectrum. They are all cogs in the futures market making opportunities for some while taking them away from others. As you review the four different types of futures trading, consider the way you strategize to recognize which class you belong to.

Hedgers:Like we mentioned before, the original purpose of the futures trading market was to hedge against price risk. As a hedger futures trader you’ll go short on the futures contracts you invest in while owning the underlying asset or other related future contracts in order to protect your existing position against price fluctuations.

Speculators: This type of futures trading has formed the backbone and support of the futures trading market since emerging. Both day and swing traders provide liquidity and activity to the futures market through their strategies. Speculator futures trading buy or sell future contracts outright in order to further speculate on a strong directional move.

*NOTE:Out of all four types, trading as a speculator is the most dangerous, as the price of any underlying assets could easily come around and put you in a position of loss deep enough for a margin call.*

Arbitrageurs: This type of futures trading has begun to transition to the automated realm as computers are programmed to identify significant price anomalies between futures contracts and their underlying assets in exchange for a risk free return. Arbitrageurs provide the futures trading market with a huge source of volume and liquidity as it takes an extremely large fund and trading volume to return a worthwhile profit.

Spreaders: Are not single contract type traders. These futures market traders reduce their risk and extend their profitability by trading future contracts with other contracts or underlying assets. Spreaders usually hold complex positions in the futures market and are known as Future Spreaders or Future Strategies. They make use of the difference in price and the rate of change in price of different, off-setting futures contracts in order to create futures positions that move within certain limits and have higher profits with lower commissions.

Major Differences Between Options and Futures Trading

(Photo credit to: Futuresmag.com)

(Photo credit to: Futuresmag.com)

One of the most common mistakes in the futures trading market is assuming a futures contract is the same as options. Though both markets have many similarities, there are major differences between the two. Both are the most widely publicized derivative and hedging instrument in the world they both serve different needs in the capital market. The biggest difference between options and futures trading is the fact that all future traders are obligated to the contract they have sold or purchased. These exposes both parties to unlimited liability if prices move against their favor. Options give the holder the right to buy or sell the underlying asset at expiration. The other difference is the initial margin and it’s use in futures contracts. Upon obligation on a futures contract the buyer only has to put up a fraction of the total.

Futures Trading Wrap-Up

With the current futures trading market in similar standards as the rest of the markets, it could be a great time to start getting involved. The cautious nature of prices may make futures contracts much more appealing. Both options and futures contracts play a pivotal role in a well-diversified portfolio, as we spoke about earlier this week. It’s good to start looking into the various options you have and see how you can get involved in the risky, but sometimes bountiful market.

Have you traded any futures contracts recently? What type of futures trader are you? Let us know!

Stay up to date on the futures trading news by getting on our FREE eMail list!

This post was written by:

- who has written 2169 posts on StockRockandRoll.


Contact the author

One Response to “What is the Futures Trading Market?”

  1. Chitra says:

    Futures Trading is a form of investment which involves speculating on the price of a commodity going up or down in the future.The 2 main types are ‘hedgers’ and ‘speculators’

Trackbacks/Pingbacks



© 2019 MJ Capital, LLC | All rights reserved