Understanding futures trading

Understanding futures trading

Many people have the idea that commodity futures trading is very difficult to understand. It can only seem difficult if you are new to futures trading, but if you understand the inner workings and get one hanging from it, you will also be on your way to success.

People have a common misconception that commodity exchanges determine or establish the prices at which commodity futures are bought and sold. That is not true. Prices are determined by supply and demand. Just keep in mind if there are more buyers than sellers, prices will be forced and vice versa.

Buy and sell orders that come from all sources and are in the channels of the exchange trading floor for execution, which are actually relevant for determining prices. These buy and sell orders are translated into actual purchases and sales on the floor.

The main function of the futures market is the transfer of risk and increases liquidity between economic operators with different risk and time settings, for example from a hedger to a speculator. Futures trading is a method used to eliminate or minimize risk when prices fluctuate in the market.

Contract futures are exchange-traded derivatives. A futures contract will be traded on a futures exchange to buy or sell a certain underlying at a certain time in the future at a predetermined price. Futures contracts are basically for takeover or hedging.

There are two groups of futures traders: the hedger who is interested in the underlying commodity and seeks to hedge the risk of price changes, and the speculator who is at a profit in predicting market movements and buying a commodity interested “on paper” for which they have no practical use. For example, goods can be bought in the market today at the price of today with the speculation of selling them at a higher price in the future.

On the other hand, the hedge protects against fluctuations in market prices. This protection is by transferring the risks of price changes to professional risk-takers. For example, a manufacturer can protect themselves from price increases in raw materials they need by hedging in the futures market.

Hedging has two ways of acquiring hedge and hedge sales. A person can buy a commodity and sell futures on the same amount as protection against price fluctuations when he is still holding the stock.

You may think that this is a game, but the fact is that speculation relates to the state of a legitimate company about the current state of the market trends. However, it is very risky for inexperienced futures traders who try to predict the market and speculate without enough funds or experience.

Since prices are distributed across the telecommunications network and the Internet, online futures trading makes it very convenient and easy for an individual. Nowadays, many brokers offer their services for trading commodity futures online. Since there is more risk involved in trading futures online than trading stocks, you have to judge for yourself whether it is worth the increased risk of trading commodity futures online.

Note that investing in futures can lead to losses. Past performance results are not necessarily a guide to future performance results.