What is futures trading?
Gaining more popularity, trading is an activity whose main objective is to make a profit. It carries out the buying and selling of various types of financial assets (currency, shares, cryptocurrency, etc.) in the financial market.
This includes the futures market which has its own characteristics. So it is essential to know these financial markets well to avoid losing your capital and make your investment profitable. To help you see things more clearly, here’s what you need to know about futures trading.
Futures Trading: What is it?
Also called a “futures contract,” a future is a financial contract involving two parties who agree to buy or sell an underlying asset. The amount of the latter is determined in advance and both parties agree in advance on the value of the property. All operations must be performed up to a certain date which must be respected.
Additionally, futures make it easier to estimate diversification in an underlying asset and increase portfolio performance. It is also used as a hedge of the latter to counter future market fluctuations.
What are the different types of future?
When it comes to trading futures, there are different contract sizes and trading opportunities in different markets. Thus, futures trading provides traders with the ability to trade in liquid markets and even short contracts. In this case, purchasing power is increased and financial commitment is reduced.
In addition, underlying assets can be of different types. It can be, for example, an agricultural raw material (corn, soy, cocoa, etc.) or even a raw material such as gold, oil or natural gas.
It can be an equity index (CAC 40, Dow Jones, etc.), a currency (Eurodollar), an interest rate (bond, T-bond, etc.) or a cryptocurrency (Bitcoin, Ether). It is possible to trade cryptocurrency futures on Margex. Thanks to Futures, you get access to various built-ins.
How does futures trading work?
The performance of futures trading is based on various parameters like margin deposit and margin call. In fact, at the time of purchase or sale, you must make a deposit that represents the insurance of the good end of the operation.
It should be noted that buying futures corresponds to an expectation of the rise of the underlying asset and selling corresponds to an expectation of its decline.
Then, in the days following the market close, you will receive margin call notifications. They represent losses or gains in your position, depending on whether or not your expectations are realized. In case of good prospects, you will therefore benefit from margin calls. Conversely, you must pay margin calls.
However, when your balance is insufficient to handle margin calls, your position may still be closed. To do this, your security deposit will be used to clear margin calls.
What is the term of the future?
A future’s maturity is simply the date on which the contract must expire. Futures generally have 4 major maturities. These include March, June, September and December. The last date corresponds to the 3rd Friday of the month, also known as 4 Witches’ Day.
Then, when you choose futures trading, you can choose the maturity that suits you. It should also be noted that in each future, many time frames are open simultaneously. These can be semi-annually, quarterly or even monthly. However, a large number of traders opt for early expiration.
When can you trade futures?
Another advantage of being a futures trader is being able to trade at any time. In fact, futures markets trade virtually 24 hours a day and 6 days a week. However, the trading hours of futures vary according to their respective exchanges. Each type of future has its own opening and closing times.
How to invest in futures?
Futures trading can be done through a broker. The latter acts as an intermediary and is responsible for routing orders to the market. For this purpose, trading futures requires a transaction fee. These fees vary from broker to broker.
What strategy should be adopted to trade futures?
To trade futures, you can use different strategies: classic speculation and hedging operations. All basic trading techniques can be performed with futures in addition to the benefits associated with this product.
Among other things, these are leverage, transaction fees, margin, liquidity, contract controls and regulation. Thus, futures represent star products for both professionals and individual traders.
As for hedging transactions with futures, they are classified into two groups: classic hedging of equity portfolios and complex hedging of derivatives.
In traditional hedging, an investor is for example able to short futures contracts up to the size of his portfolio. These hedging costs are significantly lower than ETF-type hedging products.
Finally, for complex hedging in derivatives, combining options and futures contracts expands the range of strategies available to traders. The trader has the potential to simultaneously intervene in directional elements. However, he needs to add the criteria of temporality and volatility to his strategy.
Have a good knowledge before starting futures trading
Before you start futures trading, there are several things you need to consider. First, you need to have a good knowledge of the financial markets, but especially of the underlying assets that are the foundation of your future.
Then, before any investment, you must make sure that the futures are perfect for achieving your objectives, considering their nature. These are indeed short-term speculative products.
What risk are you taking in trading futures?
Traders benefit from a leverage effect thanks to initial security deposits that are lower. However, it is important to say that leverage is a double-edged sword.
This can increase your profits, but also increase your losses, which can quickly lead to large financial losses in case of poor prospects. So it is very important to do a real follow-up of the underlying assets in time to get rid of a position that is not quite right for you.