Guide To Futures Trading
The futures contract in simplified terms is really a contract to purchase or sell by which two parties enter, they’ll agree on a price today for a ‘future’ date when the commodity is going to be purchased. As with any form of contract, this can be a binding legal arrangement, and because of this is traded on regulated exchanges. This particular derivative is speculative when you are speculating on a future price and the market movements.
Commodities are usually Forex, stock indexes, metals, foods, energy, grains, etc. Often times future trading is confused with option trading. The one similar attribute is that they both offer an expiration day’s the contract. Futures contracts are an obligation to buy the underlying share, whereas the choices contract states the right to purchase the product in a set price (strike) before its expiration. When you go long (buy) an option, the risk is restricted to what was paid out.
Futures trading uses leverage which can make this a high risk product, since this risk can be substantial, you should employ some risk management strategies and what can happen if you do not make this a priority. Since one can use more capital than they have, if not fully monitored can lose over contributing to what is within their account.
There are quite a few important rules that anyone who is trading futures may wish to abide by. First, attempt to instill the mind set to only trade future positions based upon their performance. If the position hasn’t shown any profit by the end of day two, exit or close that position. As with all trading instruments do not get emotional, do not second guess yourself, and realize you might have many losses before you begin to profit. Also it is always best to to not put all your capital in a single market, and not over-trade.
Investors whom generally do well when trading in futures are the type that first of all know their market. They did their research, analyzed historical data as well as trends. Most have a plan of action and abide by it, and they are good planners. They understand how to speculate and know the power of hedging. They’ve also carefully structured a strategic plan, and they also established their risk capital. This means they are fully aware how much they can lose, and it’ll not cause any ill effects on their everyday living expenses.
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