Futures Trading for Beginners - Classification of Futures, Methods of Analysis, Basic Trading Strategies

Futures Trading for Beginners - Classification of Futures, Methods of Analysis, Basic Trading Strategies

Do you want to understand futures trading processes to provide yourself with a stable profit? To get started, you need to understand some of the fundamental aspects of futures trading.

Futures, or rather a futures contract, is a type of contract under which the parties agree to sell or buy a particular asset in the future at a specified price. Most often, under such a contract, the current market price is set for the futures asset.

What can be an asset when it comes to futures contracts? Futures contracts are used for different commodities and non-physical assets. These can be indices, currencies, metals, goods, and so on.

Benefits of Futures Investing

Futures trading takes place using a standard contract. It means that you will be sure that there can be no changes in the conditions of cooperation between the parties to the agreement. In addition, the ability to instantly conclude a transaction and a simple settlement system are two more pros that are making the prospect of investing in futures contracts even more relevant.

Types of Futures Contracts

There are only two types of futures contracts: delivery and settlement. Delivery futures presuppose the actual delivery of the goods.

In the modern financial world, deliverable futures are used in only a few cases. For example, when the buyer needs a product and does not speculate. It also happens that the fixed price of the futures is better.

For most futures contracts, actual physical delivery may not even be possible. These contracts are examples of settled futures. Take inflation futures contracts as an example. You will receive an amount equal to the difference between the price of the underlying asset specified in the contract and the actual price as of the contract’s expiration date.

Futures By Asset Type

By asset type, futures can be divided into the following categories:

  • Commodity;
  • Stock;
  • Currency;
  • Interest rate futures.

Commodity Futures

Examples of commodity futures assets are oil, agricultural products, precious and ferrous metals, sugar, cocoa, and more. There are enough risks for the supplier in this market. For example, the crude oil price can fall depending on the political environment in the United States and other major oil supplying countries. The same applies to agricultural products: demand, weather conditions can make adjustments. Therefore, many prefer just such an asset.

Stock Futures

Index futures refers to a contract for the sale of a financial index in the future at a particular time but at a currently set price. Many traders prefer index futures because of leverage. You can get more profit, but if the price falls, your losses increase. Several major indices are in high demand in today’s trading situation. One of the most famous and popular is the S&P 500 Index. It covers 500 US companies with the highest capitalization.

Currency Futures

The currency future is a commitment based on which you buy foreign currency at the currently set price in the future.

Futures Analysis

Fundamental and technical analyses are used to determine the main parameters for successful market manipulation.

Fundamental analysis uses underlying data to predict a possible price. To get a high-quality analysis result, you need to consider exports, political events, the level of production of the enterprise, potential drawdowns in the market, and other factors. Fundamental analysis is essential to find new trading opportunities.

Price patterns repeat themselves from time to time. By identifying such patterns, you can find out the direction and strength of the current trend and the moment of its change. It’s the main principle of Technical analysis.

Speculative Future Trading

There are two main types of futures speculation. Long positions are entered into if the asset value is expected to rise. Short positions are used in the opposite case when you determine a decline in the underlying asset price in the future. When choosing this trading strategy, the main goal is to make a profit that is equal to the difference between the buy and sell prices of the futures.

To get the most out of speculative trading strategies, you have to:

  • Always be on standby because you need to hold a minimum of positions to maximize profits.
  • Monitor the market. If the market is calm, then this trading method is not suitable.

The technique itself is straightforward. If you predict a rise in the price of a futures asset, then buy it and sell it at the increased cost. But to earn a stable profit, you will need to delve deeper into the analysis of various data.

Risk Hedging

The first futures contracts were entered into agricultural commodities to hedge the producer’s income. This is still one of the most popular strategies called risk hedging. By using a contract, you fix the underlying asset price and protect yourself from unwanted rate fluctuations in the future. Many companies also use hedging to ensure foreign exchange gains.

Risks of Futures Investing

When trading futures, one cannot do without risks, as when performing any other financial transactions on the exchange, you can lose your money.

The main risks when trading futures:

  • The risk of an incorrect prediction of the value of the asset you have chosen. Futures may turn out to be illiquid if their price goes beyond the predicted range.
  • It is rather challenging to determine the price trend due to the extensive number of factors influencing its formation. The price of individual assets can depend on political events, company problems, and many other difficult to predict factors.
  • The leverage used in futures contracts is one of the main advantages of this type of financial contracts. However, if you do not properly assess the risks, you can lose even more money.

Conclusion

Trading futures on the market is one of the most popular options for making money on the trade. Using this type of trading has many advantages over other types. It can bring a stable income to a trader, but only if you correctly calculate risks, distribute your investment portfolio, analyze the current position on the futures trading market, and consider many details when choosing an underlying asset, strategies for trading, and opening times.

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