Futures Trading Strategies
Futures trading strategies can be bad or good depending on the execution of the order. Strategies that rely on hunch can turn out to be a bad experience. Trades that are based on knowledge gained through experience or trading counseling will most likely yield the best results. When considering investing in this manner in the stock market, be absolutely sure that the advice being obtained is top notch from experienced people. Futures trading is an extremely risky undertaking. Therefore a person should get as much knowledge as possible, study it thoroughly, consider the risks involved, how much money can be invested, and always keep in mind the end goal. Before jumping off into futures trading strategies, let us familiarize ourselves with some definitions and attempt to put them into context that can be easily understood. First, let's talk about what futures are.
Futures are contracts for certain commodities such as coffee, oil, sugar, financial instruments, etc. which are purchased by buyers from sellers. The futures contract is to be finalized on a date agreed to by both parties. The buyer is really speculating that the commodity being purchased will go up in value over a certain period of time agreed to earlier, and that the final purchase price will be acceptable to the seller, such that the seller can make a profit. So, if the commodity ends up not reaching a certain hoped-for value by the time the final purchase date arrives, then the purchaser will not have made a good buy, but the seller will have made a sale anyway. This is why futures trading strategies can be so risky - the buyer is trying to anticipate that the commodity will go up to a certain value and maybe higher by a certain date. Those individuals who have not had much experience in this type of trading stock should not enter into this type of a deal lightly. Futures trading strategies is really another way of defining experience in the trading arena.
In the early days of trading commodities, the market was much more unstable than it is today, mostly because there were no set standards to follow when making purchases of commodities. For example, there were not stipulations on when the goods must be delivered to the seller, or what the minimum lowest price should be, or even when trading for that commodity should come to an end. In order to instill some sort of reliability within the futures market, standards had to be put into place to answer these and other questions. In doing so, trading commodities today has become somewhat less of a risk than a long time ago. Now days the seller must be very good at understanding the behavior of commodities in the market and be able to tell when the risk is low or too high to make a good deal. These considerations all fall into the category of futures trading strategies. "For whom the Lord loveth He correcteth; even as a father the son in whom he delighteth" (Proverbs 3:12).
Futures trading strategies can also be calculating the loss and value on certain commodities over a period of time. This is termed as a "spread". If someone decides to buy beans at $2.10 a bushel in February, thinking that in June the price will go up to $2.15, then the gain will be $.05 on the bushel. Another approach would be to first sell a commodity at say $2.10, thinking the loss will happen over the next several months, to perhaps $2.05 in June. Again, the loss would be a $.05 difference, creating a gain for the buyer, because he speculated that the price would go down. So his gain is not a loss. By contrast, a buyer can also create deals going in both directions. For example, a buyer can create a spread on the commodity to predict a net change in the prices whether the price goes up or down. In order to fully understand these types of movements on the commodities, an individual would need to spend some time watching and learning how commodities behave in the market.
A quick survey of websites will reveal a plethora of self-proclaimed experts on futures trading strategies, along with well-known companies expounding their version of how to buy and sell futures. The time would be worthwhile to take some time to read many of these internet venues to glean knowledge of other's experiences whether good or bad. Some experienced traders will suggest running graphs of the MACD against the performance of the commodity in question using slow and fast indicators in order to examine the behavior and decide on a good point to jump in and buy or sell. This is how most investors examine stock performance on a regular basis, and this information can be quite revealing. However, futures are not based on past performance so this would not be a recommended strategy. Futures are based on speculation about how high the value of the commodity will rise. There could be very many factors that affect how high the value will rise and this should be examined prior to placing money.
Some websites provide access to software that allows investors to try out certain strategies for investing in the stock or future of their choice. This can be a great way to get some experience without losing money in the process - like a dry run without the risk. Take advantage of this opportunity and much will be learned about what kind of mistakes can be made and also discover what buys are best. Futures trading strategies can be based also on hunches or information gleaned from what is happening to the commodity in other parts of the world, if the desire is to invest world-wide. No matter what the goal is, the best thing to do is to educate yourself until a level of comfort has been reached handling investments in order to have a reasonable chance at success.
Futures Trading SystemA futures trading system is either a personally constructed way that a particular broker may do his or her business or it may be an electronic system that helps with a complicated day to day exchanging of futures. Futures are very widely traded commodities of natural resources. Coffee, oil, currency in the form of bullion, sugar, wheat and many other products that come from the earth are all commodities. Investors gamble on whether or not there will be shortages, windfalls, and how much the price of these commodities will be on a certain future date. An investor may have developed his own commodities system that has served him well for many years. This system that is known only to him may have made this broker a great deal of money, but this proprietary system will have to have worked inside the much larger commodities exchange market that has its own culture and set of rules. Let's see how a commodity market works:
A large banana plantation owner in Costa Rica buys a banana futures contract for twenty one cents a pound that comes due three month from today. The owner believes that while the current going rate is seventeen cents a pound, a new interest from China in his product will push the price upward another four cents by the time the three months is over. Another investor, also into buying all sorts of commodities from Central America, buys that futures contract of bananas, believing that the price will even go higher in the months to come. Should the price actually slide lower, the plantation owner still makes a profit and the buyer of the contract loses. Should the price go higher, the contract buyer makes money while the owner loses out on more profit. This is a very simplified version of the futures trading system.
A futures trading system is built on two types of traders: speculators and hedgers. While hedge traders are actually interested in whatever product is being traded, speculators are only interested in making a profit through buying and selling of commodity contracts. Hedgers work within the futures trading system to secure a future price, sometimes several months down the road for the product. Hedging helps protect against price risks. The holders of the commodities contracts are in the long position and are typically the buyers of the commodity, while the sellers of the commodity are in the short position. Futures traders are always trying to guess about what is going to happen in the future, but one thing is for certain: "It is appointed unto men once to die, but after this the judgment." (Hebrews 9:27) Only a person who has committed their life to Jesus Christ can look forward to that judgment with certainty.
Most people have seen television pictures of the trading floors of some of the futures trading system exchanges based in Chicago or New York. The traders work in what are called pits which are just large rings with steps along the side where traders stand and face each other. The people trading must be members of that particular futures trading system exchange while non-members are stuck trading through brokers who are members of the particular exchange in question. On the floor of these exchanges are the computers, monitors that report current prices and banks of phones that so many of us are used to seeing in the television pictures. Employees of the exchange walk the floors of the pit constantly to make sure that all trades are under the guideline of federal commodity trading regulations.
At the end of each day, traders have a tally sheet that tells them how much money was made or lost. At the beginning of every day the trader must have a certain amount of money in his account to absorb losses that might occur. This amount of money that must be in the account is called a margin. If the losses exceed the money in the account, the futures trading system will give a margin call to the trader, asking for that margin to be replenished. Failure to do so will end that trader's ability to continue working on the floor.
There is a great deal of money that can be won or lost in commodities trading and not only a lot of money, but also the gains or losses can mount up quite quickly. Much more quickly than typically in the stock market. The reason is that in a futures trading system, futures are able to be traded with very little money. This is called leverage, and the trader can trade for one hundred thousand dollars worth of product for as little as ten thousand dollars that is put up as a performance bond. This performance bond is what was discussed as the margin in the last paragraph. Since the transaction can take place in the matter of a few seconds, there is less risk of quick market moves to affect the outcome of the trade.
There are times when traders, in the midst of all the shouting and the back and forth action between them, can disagree as to what was said on the floor. In cases like this, the exchange will not allow these traders back on the floor until the dispute is resolved. Issues like the agreed price might actually be in dispute. The open air exchange of the commodity trading floor might seem archaic and clunky to some, but its supporters maintain that it is the best way to keep trading at an above board level. The lure of big and quick money might entice some people to try futures trading, but the advice here is to really know the business inside and out before trying it for real. There is just too much money that can be lost too quickly for an amateur to be dabbling in the futures game.