Futures Trading Strategies for Beginners
Futures trading, like every single type of trading, can be difficult if investment strategies are not defined and applied properly. Different from other investment types, however, there are those who point to the fact that futures market is also referred to as a ‘zero sum’ game. This means for every profitable trade, there is an equal losing trade.
If you are planning to engage in trading futures, it will be very useful to understand what futures are and how they work. Expanding your knowledge and arsenal of investment strategies before executing trades increases the prospect of success while lowering the chances of losing your funds.
The Basics of Futures Trading
In its simplest form, trading futures is just trading futures contracts. These are agreements made to buy or sell an asset at some time in the future at a specific price. You can trade futures on all kinds of assets including commodities such as orange juice, cotton, sugar, oil, and gas as well as index futures, such as FTSE futures.
Futures trading can make good sense. For example, a farmer may expect a surplus next season and want to lock in a price now with a buyer, assuming they would get more for their produce now. The person buying the product may also prefer to buy now, knowing they will need a large quantity next season.
Here are a few more things you should know about futures contracts:
- Standard contract size
Futures have standardised sizes according to the commodity.
- Delivery months
Known also as contract months, delivery months are written into the contracts to specify when the goods will be delivered. Quarterly delivery schedules are also sometimes instituted, especially for contracts based on US exchanges.
- Ticker symbols
Futures, just like stocks, have their own ticker symbol that outline the commodity as week as the date it will be traded.
- Tick sizes
The minimum fluctuations a market is able to move.
- Offsetting transactions
Futures contract can also be traded before they mature. Using offsetting transactions you can counter the transaction before the expiration date. People use this method to realise current changes (profits or losses) or to avoid a possible unwanted future event.
There are three fundamental strategies you should consider upon engaging in futures trading:
- Go Long
‘Go long’ means that if an investor expects the price of a particular commodity to increase over given time, he or she may profit by buying futures contracts. However, if the price declines, the trade will result in a loss.
- Go Short
‘Go short’ is the opposite of going long. This strategy profits from an expected decrease in price. Instead of buying a futures contract, you sell it. It practically means that if a commodity price goes down, a profit can be realized by later purchasing an offsetting futures contract at a lower price.
A spread involves trading at least two different contracts in tandem. It is the buying of a futures contract in one month and selling another futures contract in a different month. The purpose is to profit from an expected change in the relationship between the purchase price of one and the selling price of the other.
When you expect a change in both the buying and selling prices, you can take advantage of these price changes to generate profit. You can go long on one contract and short on the other, or you can buy and sell two independent future contracts at the same time with different dates of delivery.
Using Stop Orders
When trading futures contracts or other assets, suing stop orders can prove useful. A stop order, in a way, puts limits on the amount of money that you are willing to lose in futures trading, as it signals to your Advisor to buy or sell your asset once the designated stop price has been reached
To conclude, you may use various kinds of spreads and additionally more complex futures trading strategies to generate high returns. But first, you ought to fully understand the risks involved to avoid heavy losses.
Optimized way to trade futures
To elaborate effective financial strategies with futures, you can join R1Investing. It is one of the major Advisors in the world that provides a trader-focused service and personalized approach. ROI makes trading optimized since it conforms to the needs of investors with different experiences and skills. The service offers an array of account types for beginners, mid-level traders, and professionals. It enhances trading experience with a wide array of benefits:
- Tight spreads;
- Regulated trading environment;
- Transparent investment conditions;
- Fast 3-steps start;
- Top-notch MT4 platform;
- Dedicated 24/7 support;
- Huge variety of learning materials.
With ROI, traders can explore the futures market freely and get the most out of trading while enjoying an excellent trading experience from any part of the world at any time.