Gaining more and more popularity, trading is an activity whose main purpose is to make a profit. It consists of buying and selling various types of financial assets (currencies, shares, cryptocurrencies, etc.) on the financial markets.
Among these are the futures markets, which have their own characteristics. It is therefore important to know these financial markets well to avoid losing your capital and to make your investment profitable. To help you see things more clearly, here is everything you need to know about futures trading.
Futures trading: what is it?
Also called a “futures contract”, a future is a financial contract involving two parties agreeing to buy or sell an underlying asset. The amount of the latter is determined in advance, and the two parties agree in advance on the price of the asset. All operations must take place until a due date, which must be respected.
In addition, the future makes it easier to foresee variations in an underlying asset and increases the portfolio’s performance. It is also used as a hedge of the latter to counter future market fluctuations.
What are the different types of futures?
When it comes to futures or futures trading, there are trading opportunities in different contract sizes and different markets. Thus, futures trading allows traders to trade in liquid markets and even smaller contracts. In this case, purchasing power is increased and the financial commitment is reduced.
In addition, the underlying asset can be of several types. It can be, for example, an agricultural commodity (corn, soy, cocoa, etc.) or even a commodity such as gold, oil or natural gas.
It can also be a stock index (CAC 40, Dow Jones, etc.), a currency (Eurodollar), an interest rate (Bund, T-Bond, etc.) or of a cryptocurrency (Bitcoin, Ether). It is possible to trade cryptocurrency futures on Margex. Thanks to futures, you will have access to various underlyings.
How does futures trading work?
The function of futures trading is based on several parameters, such as margin deposit and margin call. In fact, during the purchase or sale, you must make a deposit, which represents the insurance of the good end of the operations.
It should be noted that the purchase of futures corresponds to an expectation of the increase in the underlying asset, and the sale corresponds to an expectation of its decrease.
Then, the days after the market closes, you will receive margin call notifications. They represent the loss or profit of your position, depending on the realization or not of your expectation. In case of good expectation, you will therefore benefit from the margin call. Conversely, you must repay the margin call.
However, when your balance is insufficient to handle the margin call, your position can still be closed. To do this, your deposit will be used to clear the margin call.
What is the future term?
A futures maturity is simply the date on which the contract is to expire. Futures generally have 4 major maturities. These include March, June, September and December. The end date corresponds to the 3rd Friday of the month, also called the day of the 4 witches.
When you then choose futures trading, you are free to choose the maturity that suits you. It should also be noted that on each future there are many deadlines open simultaneously. These can be semi-annual, quarterly or even monthly. However, a large number of traders choose the earlier expiry.
When can you trade futures?
Another advantage of being a futures trader is being able to trade at any time. In fact, the futures markets trade practically 24 hours a day and 6 days a week, but the trading hours for futures vary depending on their respective exchanges. Each type of future then has its own opening and closing times.
How does the investment in futures take place?
Futures trading can be done through a broker. The latter acts as an intermediary and is responsible for directing the orders on the market. For this purpose, transaction fees are required for futures trading. These fees vary from broker to broker.
What strategies should be adopted to trade futures?
To trade futures, you can adopt several strategies: classic speculation and hedging operations. All basic trading strategies can be performed with futures, in addition to the advantages associated with this product.
These include leverage, transaction fees, margin, liquidity, regulation and regulation of the contract. Thus, futures represent star products for both professional and individual traders.
Regarding hedging transactions with futures, they are categorized into two groups: classic hedging of equity portfolios and complex hedging between derivatives.
In the case of traditional hedging, for example, an investor is able to short futures contracts up to the size of his portfolio. The costs of this hedging are significantly lower compared to hedging products of the ETF type.
Finally, in terms of complex hedging between derivatives, the range of strategies available to traders expands after combining options and futures contracts. The trader has the opportunity to intervene simultaneously on directional elements. However, he must add temporal and volatility criteria to his strategy.
Have a good knowledge before you start trading futures
Before you start trading futures, you need to consider several factors. First of all, you must have a good knowledge of the financial markets, but especially of the underlying asset, which is the basis of your future.
So, before any investment, make sure that the futures are perfect for achieving your goals, taking into account their nature. They are truly short-term speculative products.
What do you risk in futures trading?
The trader benefits from a leverage effect thanks to the initial security deposit, which is low. However, it is important to state that leverage is like a double-edged sword.
It can amplify your gains, but also your losses, which can quickly lead to large financial losses in case of bad anticipation. It is therefore very important to do a real follow-up on the underlying asset in order to timely liquidate a position that did not suit you at all.