Futures markets are gaining popularity among Future Contracts traders and investors. Despite being complex, futures offer mesmerizing rewards that attract traders and investors. Traders and investors who are willing to place stakes in this market need to have a thorough understanding of its aspects to have a successful trading experience.
Future trading requires proficiency in the future market and the underlying it is associated with. Traders can place their stakes in the market, which suits their trading strategy. Index futures, Futures on stocks, FX futures, etc., are examples of common futures contracts.
What is Futures Trading
Futures are derivatives that derive their value from underlying. It enables traders to speculate on either side of the market. Since Futures are derivatives, they get affected by a rise or fall in the underlying price.
Futures are contracts that bind traders to buy and sell a derivative at a specified price and date. Traders involved in a future contract must buy or sell the derivative on the agreed price and the specified date. Hedgers and speculators are two primary participants in futures trading.
Hedgers may use Futures contracts as a protection against unintended changes in the price of an underlying cash commodity. Speculators invest in Futures contracts after going through the aspects of the associated market and making reasonable anticipation as per their trading strategy.
Traders need to thoroughly go through the underlying to understand the prospect of the contract. Futures contracts remain intact irrespective of the market conditions. These are some of the benefits offered by Futures trading:-
- Futures are highly preferred by traders and investors, which provides them with higher liquidity.
- Traders with a detailed market understanding can use these contracts to make reasonable speculation.
- Traders can explore multiple markets to find opportunities to make reasonable speculation. It adds an edge to the trading strategy and allows traders to find better opportunities to make rational decisions.
- Futures facilitate a more fair trading facility for traders.
- Traders can follow the trading strategy that suits their speculation of the market.
These are some of the things that traders must keep in mind while trading Futures:-
- Just like other trading methods, it has a risk of loss. Traders and investors can even lose their initial investment while trading Futures.
- Since they derive their value from the underlying, the volatility also impacts the crowd expectation.
Different Assets Traded in Futures
These are some of the assets traders can trade with futures:-
Futures on Stocks: In these, the underlying asset is the stock. Traders buy and sell the Futures of the associated stocks in the specified lot size after considering their trading strategy. Traders may find opportunities to make trading decisions in the Futures on stocks.
FX Futures: These are associated with Forex, and traders involved in this contract agree to buy and sell a specific currency in the specified lot size at a predetermined price and date. Traders and investors prefer FX futures to find trading opportunities. However, the risk and opportunities go hand-in-hand in FX futures. Forex being a volatile market, can take an unprecedented turn. FX futures must be traded by traders and investors after thorough consideration.
Commodity Futures: These are Futures where the underlying asset is a commodity like metals, petrol, agricultural products, etc. Trading in this market can also allow traders and investors to make reasonable speculation.
Index Futures: Traders and investors need to make reasonable speculation by conducting a market analysis regarding the inclination of the associated index in the future.
Futures are one of the potent options for traders and investors. Traders must decide to invest in a Futures contract after going through the aspects of the underlying terms established in the contract. Traders can trade in FX futures, Futures on stocks, Commodity Futures, etc., and make rational trading decisions. Trading in Futures requires a thorough understanding of the market, and risk management.