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A Brief Introduction To Futures Trading

Top 7 Futures Brokers

Futures Trading has been around for more than a century and was primarily conceived to reduce the price fluctuations for a broad range of commodities that are exchanged in the global marketplace. Initially, the price of commodities used to peak exponentially during off-seasons and the supply exceeded demand during on-seasons. Therefore, both scenarios resulted in a huge loss of money as well as commodities, which essentially required both the buyer as well as the seller to hedge against market fluctuations by entering into a contract of future price guarantee.

In futures trading, two different parties, the buyer and the seller, enter into a contract to fix the price of an underlying commodity to hedge against any future uncertainties in the global marketplace. This contract does not involve the actual transfer of commodities between the two parties but is merely a paper contract that guarantees the price of a commodity at a future date. These contracts between the buyer and the seller are known as Futures Contracts. In Futures trading, the buyer is hedging against a future rise in the price of a commodity, while the seller is hedging against a decline in price of the same commodity. Ultimately, all Futures Contracts have expiry dates, and both the buyer as well as the seller looks towards minimizing the losses due to any future price variations.

Futures trading involve a range of commodities such as Oil, Gold, Silver, Wheat, Corn, and all other similar commodities that are openly traded in the global markets. Even currencies are considered as a commodity, as the prices of different commodities are paid in currencies, which brings individual currencies under the Futures contracts.

Investors & The Concept Of Trading Futures Contracts

Futures TradingThere are basically two types of investors in the Futures Trading markets. The hedgers, also known as the core participants in the Futures market, are purely in the market to hedge their capital and commodities against price fluctuations, and these investors seek to reach a middle ground that guarantees to diminish their potential losses. On the other hand, speculators are purely traders who bet on the Futures markets to take advantage of the rising and falling prices of Futures contracts without actually getting into a contract with either the buyer or the seller.

The Futures trading market is extremely volatile and the volatility of a Futures contract increases when it is close to its expiration date. When a Futures contract reaches its expiry, more traders come into the fray, and almost all Futures contracts experience a great amount of volatility that can swing the price of the underlying contract by a hefty margin. This is one of the reasons why trading Futures is considered to be highly risky for speculators who trade on margin or using leveraged accounts.

Trading Futures contracts on margin can result in wiping out an entire account, and can even lead to the investor owing money to the broker. However, on the flipside, trading on margin also ensures a hefty amount of profits if the trader is accurate in his market speculation. Futures trading offer the unique ability for an investor to control his risk by risking only a fraction of his investment capital and use the leverage available in the markets to generate hefty profits.

Who Determines The Volumes & Prices Of Futures Trading?

The Futures market is extremely liquid, and the liquidity increases when the contract nears its time of expiry. Therefore, a large number of factors influence the volumes and price of contracts in the Futures market. The primary price point of a commodity in a contract is determined by the demand and supply, which forms the basis for creating a Futures contract in the market. Once the contract is established, several market economics such as news releases, the price of related commodities, investor interest, and other market factors can influence the price of the contract. Due to the open nature of the markets, the price of contracts cannot be manipulated by any single entity, which is one of the major advantages of Futures trading. Unlike other forms of trading such as stock trading or currency trading, Futures trading is relatively free from manipulation, which helps a trader to make proper predictions based on market data.

How To Find The Most Profitable Futures Trading Strategies?

Futures trading can be considered as an iteration of the derivatives market and works similarly to the traditional stock markets model. Speculators can go long as well as short on Futures contracts, which is similar to Stock or Forex trading. Therefore, there are multiple strategies available in Futures trading.

Traders should always demo trade Futures contracts using a reliable broker to test out different strategies and get a basic outline of how the Futures market perform in the real-life scenario. Several traders are known to combine the various aspects of strategies used for Forex and Stock trading by analyzing the markets and ensuring that the market sentiment reflects the tussle between demand and supply. Traders should realize that all strategies have their own distinctive set of advantages and disadvantages; therefore, a trader can both profit as well as lose all of his investments in Futures trading.

Traders can also benefit from managed accounts that trade Futures contracts using client funds. This is a relatively low-risk strategy that can circumvent the inability of a trader to accurately analyze the markets to make consistent profits. Alternatively, a trader can also use a signals service provider to receive daily trading signals that can be used to trade successfully in the Futures market.

What Is Binary Futures Trading?

Binary Futures trading is a new concept in the financial markets that allows a trader to bet on the price fluctuations of a Futures contract and receive fixed returns per trade that is in the correct direction. The losses in binary trading are also limited to the investment capital, and a trader does not lose more than his invested capital. Binary trading is a great tool for traders to invest in the markets without having to spend a lot of time on analyzing the markets and holding on to long-term trades.

Binary options offer the option of trading any Futures contract in the market, unless it is expired. Most binary options brokers offer the option of investing in Futures contracts that are nearing its expiry, since these contracts are mostly volatile and can present great trading opportunities for traders looking to make quick profits.

Futures Trading Brokers & Regulation

Futures trading is regulated by the CFTC in the US, and all brokers as well as market participants are required to be registered with the NFA. Since Futures trading is considered to have a significant impact on the global economy, all those involved in the Futures market is strictly scrutinized by several regulatory authorities from around the world. Fraudulent activities such as price manipulation and other financial scams are strictly dealt with that includes hefty fines and life-time bans on all individuals as well as entities.

As far as speculators are concerned, trading the Futures market involves investing in the direction of the markets without actually getting involved in the price making process. However, the speculators also have a huge role in the price action of these commodities, as speculators are understood to have a better understanding of the underlying as well as future trends of commodity prices, which is why prices tend to fluctuate every time a trader enters the market.

Futures trading is certainly an attractive proposition for those who have a sound knowledge of the commodity markets, and how economic events affect the price of a commodity. Futures contracts can be traded on margin, which allows traders to limit their market exposure by investing a small capital. However, for the uninitiated, Futures trading can be extremely risky, and without any proper money-management strategies in place, can quickly end up wiping out the entire account and even result in a negative balance. Every trader participating in the Futures market should carefully analyze their risk-appetite and have a clear understanding of the markets before deciding to invest into the highly-risky Futures Contracts market.