Jun 24, 2020
Basic knowledge of futures trading
Have you ever heard of futures trading?
Many people trade in futures markets, from day trading to position trading.
There are also futures options, in which the trader trades an option contract directly related to the underlying futures market.
What on earth are they trading?
The future of commodity trading is different from the stock market, where people buy stocks.
When you want to trade futures, you have to deposit margin.
This is to prevent the market from going against you, and you'll have enough money to pay the brokerage firm for the loss.
Although speculators make up the bulk of futures traders, the purpose of the market is to protect farmers from losses.
A farmer can hedge futures to protect him from any losses on the spot market.
Farmers can sell wheat futures.
If he thinks the wheat market will fall before the harvest, he can do so.
If a baker thinks prices will rise before harvest, he may buy futures.
Both will guarantee the price of wheat whatever happens in the market.
Speculators are only interested in profitable trades.
If he thinks the market will go up, he buys futures.
If he thinks the market will fall, he sells futures.
You don't need a contract to sell it.
Every trade involves risk.
This is why some traders only buy futures, so they know their risk is limited by the price of the option.