The Basics of Futures trading

Once you’ve learned the basics of futures trading, you may want to specialize in one or two types of contracts. Some of the most common strategies include going long or short in a position, calendar spreads, and bearish or bullish options. Going long means buying a contract and expecting the underlying asset to rise in value. While you’ll gain from this strategy, there are also risks associated with it. When you’re new to futures trading, you should never use all of your account’s balance at once.

Futures contracts are a great way for producers to lock in prices. For example, an oil company might want to lock in a price for its output by selling oil futures to investors. Other uses for futures contracts include hedging the market for commodities a company will consume. An airline might buy jet fuel futures so that it can ensure its expenses will remain predictable. These are just a few of the many advantages to futures trading.

Futures contracts have specific expiration dates. They last between one and three months. The near, middle, and far months are known as “contract months,” and new contracts are issued the day after the old ones expire. This means that traders will make money by predicting future price movements of different products. A trader will also be able to benefit from trends and make a profit by predicting market conditions and identifying profitable opportunities. It’s important to remember that futures contracts are often based on commodity prices.

One important aspect of futures trading is the margin required to buy and sell commodities. This money is deposited with a futures commission merchant. If the margin required to trade a commodity rises or falls, the brokerage firm may be required to increase the margin requirements, and you could face a margin call. This is why it is important to read your customer agreement with your brokerage firm. That way, you can minimize the risk associated with losing all of your money.

Speculating on the future price of a specific commodity can be done through the use of futures contracts. If the price ends up being higher than what was agreed upon in the contract, the trader will make a profit.

After that, they would sell it at the current price, and the difference in price between the original price and the current price would be settled in the investor’s brokerage account. On the other hand, if the price were to go down, they would end up losing their money. Trading futures comes with a significant potential for financial loss but also offers substantial upside potential.

The use of electronic exchanges and futures commission merchants are the two most common ways to trade in futures. The Chicago Board of Trade was the first to open its doors in 1871, and the Chicago Mercantile Exchange followed ten years later in 1919. Only a small percentage of trading on these exchanges is still done using the open outcry method, as electronic trading has largely replaced it.

Electronic trading is more convenient and less expensive than the conventional method. CME Group provides limit and side-by-side electronic trading in addition to electronic only trading for its customers.