Understanding The Basics of Futures Trading

Futures trading is all about the futures contract – a formal agreement (obligation) to buy or sell a specified quantity of a commodity, sometime in the future. Every futures contract needs to have an opposing contract before the trade can actually occur. The futures market is a zero sum game, for every dollar made, someone else loses a dollar.Trades can occur right on the floor of the trade exchange, in the trading pit, which is the more traditional setting. But trades can also occur electronically with customers able to submit their buy or sell options from anywhere they have access to an internet connection. Once submitted to the exchange’s computer system, the computer matches up trades and forwards them to the pit where they are then executed.Futures traders make decisions to buy or sell based on how they believe the price of a commodity will fluctuate in the future: up or down. If an investor believes the price of a commodity such as beef will increase in the future, they buy the commodity at today’s price and they wait. That’s considered going long. In a few months if the price does actually increase, the futures contract is sold at the higher price and the investor ends up making a profit. If the price instead decreases, the investor will lose money on the contract.If on the other hand, the investor thinks the price of the commodity will fall, as they sometimes do in a declining market or when there’s an abundance of supply, they agree to a futures contracts to sell, which is considered going short.Many different commodities are available to trade in the futures market. Prices in this market can fluctuate fast so you need to have a trading plan that can respond to these changes quickly and correctly. Your plan should tell you when to enter a market, when to exit at a profit, and when to exit at a loss.

Fundamental vs Technical Analysis

Changes throughout the world can influence prices in the futures markets. The passage of government regulations, weather and other environmental conditions that affect supply and demand, government instability, wars, and natural disasters can all cause the price of commodities, currencies, and indexes to fluctuate wildly and rapidly. Various economic indicators such as interest rates, GNP and tariffs also have an impact on these prices. These factors are known as fundamentals.Analyzing fundamentals across the globe can be an overwhelming task, and is usually futile, unless you have access to better information than the institutional traders. Ultimately, these fundamental factors all affect price, and price instantaneously takes into account all known data. Price is the ultimate barometer of the supply and demand of a commodity.Rather than try to understand every fundamental influencing the price of a particular commodity, it is more important to be able to respond to price changes as they occur, and be able to identify price trends. This is known as technical analysis.The important thing is to be able to make a profit, not understand every factor affecting the price of copper or coffee. Would you rather be rich or right? Generally, you should focus on technical analysis because you have neither the capital or the time to wait to perhaps pick the correct long term trend.Many tools have been developed to help those who invest in the futures market. Traders can purchase forecasting software, they can join and participate in on-line chat rooms, and traders can make use of the services and expertise of commodity trading advisors. Still, most people who enter the futures markets end up losing money. In the end you need to develop your own trading approach that ensures consistent profits. Often the best approach is to leave the chat rooms behind and make up your own mind, and develop a trading strategy that works for you. We will explore this in other articles.