The Essence of “Future Trading”
Future trading is more commonly known as a form of investment which involves a speculation on the direction of the price (up or down) of a commodity or commodities in the future. If you are asking yourself what is a commodity, well, the answer is pretty simple:
It can be the gold on your ring and necklace, the wheat that makes the biscuit or the scone in your tea break, the corn in your cereals’ breakfast or the metal that your armchair is made out of.
In fact, all of the commodities we just mentioned and many others are being traded on a daily basis amongst millions of investors worldwide. Generally speaking, “Future Trading” is mainly speculative and involves you, the trader, holding a piece of paper which is better known as a future contract.
Who trades in futures and why?
Everybody can trade in futures. The reason for this is directly related to the fact that future trading presents you, the trader, with a lucrative investment opportunity that doesn’t require you to actually “BUY” or “SELL” an actual commodity, but instead place a position on a broker’s trading platform and simply exit the position at the right time.
On the contrary, you can also choose to cancel your position at any given time. In fact, most future trading contracts are held only for a short-period of time. Let’s take for example today, the 5th of November, 2015. Imagine that you are reading the technical analysis section at Opteck and conclude that the price of Silver will be going down until mid-January.
The available Silver contracts that you can select are December, January, February, March and April. As a rule, the closer the contract is to expiration, the more liquidity it has, meaning that more and more traders are trading them.
What are the advantages of futures trading?
There are several distinct advantages to future contracts over other forms of investments:
Future contracts are considered as highly leveraged investment products. In order for you to be able to “hold” a futures contract, you only have to invest a very small amount from the total sum of the value of the contract, also known as a “margin”. To put this in a clearer perspective, you can trade with a significantly much larger amount.
In the event that you predict the market movement correctly, your profits will then be multiplied. This is considered as one of the best return on investment outcomes when compared with buying or selling an actual commodity.
When trading futures, the “margin” is used as a type of a security. In the event that the market moved in the opposite direction to your position, you will only be able to lose a fraction of your margin, or in some cases all of it, but when the market moves in the same direction as your position, you will make a profit and get your margin back with extras.
- You can make money much faster when you perform future trades. Primarily, because you are trading with approximately 10 to 200 times as much as your “margin” amount and secondly, because the futures market tends to fluctuate much quicker than other markets.