How does the future market work?

If you don’t know it by now, the futures market is considered as a worldwide central marketplace for both buyers and sellers who have a common goal: to trade on futures (future trading). Prices in the futures market vary based on “Bids” & ”Offers”, whereas the futures trading contract itself states the amount that will be paid together with its delivery date.

It is also important to note that a future trading contract is essentially a sort of an agreement between 2 different parties: the holder of the “short” position (the one agreeing to sell) and the holder of the “long” position (the one agreeing to buy).  

Futures Trading: Basic Structure      

As a rule, futures trading involve 2 main components: profit and loss. They are directly related to the volatility of the market where the contract is being traded on and are being calculated on a daily basis. The so called “price“ of a futures trading contract is actually presented by the predetermined price of the actual underlying financial instrument that will eventually be delivered in the future.

When you decide to open a futures contract, there is always a minimum sum of money that you’ll have to deposit into your broker’s account. This sum is called “initial margin” and as soon as your future trading contract is liquidated, your initial margin will be returned to you in addition to any profits or losses that took place over the course of the futures contract.

The Importance of Leverage        

An integral part of futures trading involves the term “leverage”. Thanks to leverage, you are able to trade on multiple financial instruments while having to utilize only a very small amount of capital. To put it in simpler words, you are able to enter into a futures trading contract that’s actually worth much more than you had to pay for it (the sum of money you had to deposit).

One of the reasons for this is directly related to the notion that in the futures trading market, the change in prices is powerfully leveraged (more than any other market), therefore, only a fraction in a futures contract price leads almost instantly to a major profit or loss. Due to this particular situation, the smaller the margin is in direct relation to the cash value of the futures trading contract, the higher the leverage.

Futures Trading Strategies

  1. Long”-If and when you decide to go long, you basically enter a futures trading contract through buying and receiving delivery of the underlying financial instrument at a determined price, therefore, in order to profit from this move, you expect that the future price will increase.    

  2. Short”-If and when you decide to go short, you basically enter a futures trading contract through selling and delivering of the underlying financial instrument at a determined price, therefore, in order to profit from this move, you expect that the future price will decrease.

  3. Spreads”-Both “long” and “short” are in fact positions that include the action of buying or selling of a futures trading contract for the purpose of benefiting from an increase or a decrease in its price. Spreads actually deal with benefiting from the difference in price between 2 different contracts of the same underlying financial instrument.