Futures Trading Strategies – Explanation
Futures Trading Strategies are based on speculative investing. The main idea behind these trading strategies is based on the investors having no hold on the commodities they are trading in. Instead, a contract is signed and both buyer and sellers hold on to the contract.
Because the contracts are bound to be cancelled, most dealers often do this for their convenience with the aim of making a profit.
In dealing with these trading strategies, investors use speculation on the trend of whether the commodity price will fall or rise, and this will determine the likelihood of investors gaining from such ventures.
This type of strategies takes physical commodities, bonds and stocks. The main stakeholders in future trading strategies are the hedgers and speculators.
The hedgers are the manufactures or producers of the commodities on sale. For example, farmers, miners, oil firms and shareholders are all hedgers. Their interest is in protecting themselves from futures changing in price of what they offer to the market.
→ How to use the Hedging Trading
Speculators, on the other hand, are investors or private-floor traders. Examples of futures trading strategies are banks and stockbrokers. They buy future-contracts from which they make profits when the prices rise. They also sell contracts when they speculate a fall in price.
You can learn more about futures and options surfing the blog page. Many pay attention to future trading hours as well.
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Futures Trading Strategies – Practical Example
Investors give sellers a small amount called margin, usually a small percentage. Larger amounts are paid when the commodity in the market is out rightly bought.
When the predictions made are right, the investors make a multiplied profit of the paid margin. The margin is a security bond.
If the prediction of prices goes against the investor’s prediction, the investor incurs losses.
An example of futures trading strategies, consider an investor who thinks oil prices will rise and elects to spend $1,000 to get 100 barrels. If within a month the price rises by 10 percent, the associated future-contract also grow with the same percent to $1,100. Paper investment In the above example, the investor does not have to have the oil barrels in his warehouse.
This means that commodity rarely gets exchanged. The contracts are just a show of agreement and expiry is the same as that of actual contracts. The clean investors especially do not have to get down with the tangible commodities to make a profit when using these trading strategies.
They also pay a lot of attention to trading charts.
Pros and Cons
Traders in this market are bound to make money without getting into the ground and get the basics of the commodities in which they are dealing.
As explicated earlier, in futures trading strategies, the profits are high upon correct prediction. Another benefit of this trade is connected to the liquidity of the markets. Orders in these strategies can be placed quickly, making the experienced investors get their money fast. Lastly, commissions in the trade are less when compared to other forms of investment.
The main con of these trading strategies is in the case of bad prediction; in this case, a loss is fast as profit, and this often discourages most investors. Consequently, these trading strategies need a lot of speculative knowledge on the market trends.
To sum it up, when it comes to futures, all the trading strategies are based on prediction of the forthcoming price of the commodities in which an investor is interested. The business being fast calls for investors to have a sound mind in making their plans.
Analytical tools are essential to help prospective investors in reading and predicting upcoming trends with accuracy. Many such tools have been brought up with computer use and application. You can use many types of strategies to make money with futures trading.
Here we’ll discuss how to start simply with any of the four basic trading strategies. You can also take a future trading course.
How does buying in “Going Long” make money from an expected rise in price in Futures Trading Strategies?
Do you have reasons to expect that a commodity’s price will increase soon? If so, then you would start by buying contracts for that commodity now.
What happens if you were right about predicting that price increase? You’ll earn profits by selling those contracts when they are worth more money later. However, if the price falls instead of rising, you will suffer a financial loss.
Depending on your amount of leverage, you can both lose and gain much more than your initial margin investment.
How does selling in “Going Short” earn profits from an anticipated fall in price?
These strategies are exactly the opposite of the going-long strategy. You go short by selling your futures contract when you believe the price is about to go down soon.
What happens if the price does decrease later? You can purchase the same futures contract again at a cheaper price to make money. The difference between your selling and buying prices determines your amount of profit.
Both buying and selling futures contracts require the same maintenance-margin investment. Additionally, going short affects your brokerage account in the same way as the going-long strategy. These are strategies that work.
How does a spread work in Futures Trading Strategies?
Usually, the average speculative transaction includes straight forward buying or selling of future contracts to profit from expected increases or decreases in prices. However, spreads are another one of many other strategies that you can use as well.
Spreads profit from the difference between the selling and buying prices of two separate trading strategies contracts of the same commodity. When you expect a change in both the buying and selling prices, you take advantage of these price changes to make money.
You can go long on one contract and short on the other, or you can buy and sell two independent contracts at the same time with different dates of delivery.
How does a “Stop Order” work?
It’s important to put limits on the amount of money that you’re willing to lose in your futures contracts. That’s why you make a stop order, which is a plan for your broker to sell or buy your futures contract whenever its price hits your limit.
You can use endless kinds of spreads and other futures trading strategies to make money. Some of them are incredibly complex, so you should only consider complicated strategies after you completely understand the risks involved.