DavidFuture Contracts, or Futures, as they are commonly known, are a speculative market. Futures are high risk, high reward markets, full of ups and downs. According to the Commodity Futures Trading Commission, “A commodity futures option gives the purchaser the right to buy or sell a particular futures contract at a future date for a particular price.” That means you will most likely never see nor handle a physical commodity. Your investment is in a contractual agreement between two parties that spell-out what will be sold and when the good will be delivered. Understanding how the overall market works is key to successfully trading futures.
Understand Market Volatility
Here is an example of futures market volatility. A clothing designer enters a contract to purchase 10,000 shirts at five dollars each from a T-shirt manufacturer on a specific date 6 months from today. If during that time the price of cotton somehow skyrockets, the manufacturer cannot pass this cost on to the designer, the date and purchase amount are in the contract. In this example, the manufacturer is contractually obligated to make the transaction, even if at a severe loss. Futures contracts fluctuate based on the volatility of other markets. Understanding how the market will move is crucial to successful futures trading.
Know Your Session
Futures are an after-hours market. You may be surprised to find out the overall marketplace is divided into 3 seasons. Your ability to trade is limited to these time zones. The premarket trades from 4 am to 9:30 am EST. The regular market trades from 9:30 am to 4 pm EST. The after-hours market trades from 4 pm to 8 pm. You must trade within the proper session. The result is market fluctuations that affect futures contracts happening while the futures market is closed. Your entire investment can shift dramatically during other sessions. It is extremely helpful to know the factors from other sessions that drive your contracts.
Choose a Platform
When it comes to trading, a multitude of platforms exist. One thing that buys them all though, is they must be registered with the CFTC. This uses the official government regulating agency overseeing the futures market. As such, compliance with their rules and regulation is essential to your success. There are quite a few large investment firms like TD Ameritrade and Charles Schwab to name a couple. In the world of investing, it always behooves you to double-check the credentials of those you are doing business with. The rules and regulations can be difficult to navigate for individuals. Talk to someone with a proven reputation.
Develop an Investment Strategy
Long, short, and spreads are the three basic investment strategies for the futures market. In our earlier example, the designer (long) is looking to profit by purchasing T-shirts at the agreed-upon price with the expectation that prices will rise. Conversely, the t-shirt manufacturer (short) is looking to profit by selling T-shirts at the agreed-upon price with the expectation that prices will fall. You can invest in either side or you can mix it up with a spread strategy. You can speak to a broker or do the research yourself. Every major trading platform comes equipped with tools specifically for research.
Trading futures contracts is a viable investment strategy yes, there are ups and downs but that is with any market. This is a great tool for those who want to hedge large amounts of money with little to no capital. The losses can be great but so can the gains. With the right knowledge, anyone can successfully trade futures.