What Exactly Is Futures Trading?
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People who have no knowledge about futures contracts wonder, "What is futures trading?" Most of them think that it involves extraordinary financial risk and wealthy people. Though the two things often go hand in hand, this is not the case with futures trading. So, what is meant by trading futures? Futures are contracts to deliver a particular amount of commodity on a certain specified date in future. Some of the commodities which are normally traded include agricultural commodities like soybeans, wheat, rice or metals like copper, zinc, gold, or currencies. Trading futures is entirely different from many other types of investing because a person who trade futures is not required to own or buy the commodity. A trader has to make his trading decision by speculating on the movement of price of a commodity in the near future. For example, if the trader believes that the price will move upwards, he will buy the commodity. Similarly, if he anticipates that the price will fall, he will sell the futures contract. If his prediction holds true, he will profit from the trade. On the other hand, if his speculation turns out to be wrong, he will incur loss. A large portion of future contracts is traded by speculators; most of them liquidate their trading position before the expiry of the contract either making profits or incurring losses. In such a transaction, it is not the responsibility of the investor to deliver the commodity. Speculators play a vital role in the economy because they trade in bigger volumes which affect the price movements of commodities, and thus the economy. Hence, it is necessary to monitor trading volumes to get a clear picture of the price movements. Moreover, speculators make it easier for people who take actual delivery of the commodity to plan for the future. The real buyers and sellers feel comfortable knowing that there is always someone available in the market to buy the contract when the contract is being sold or sell the contract when the contract is being purchased. However, trading futures is a long-term learning process. If you wish to trade futures, open an account with a reputed futures broker who has a good track record. Choose the commodity you wish to trade. And keep an eye on the market to determine price movements to determine your trading position. Use historical price charts, patterns, current news and other important indicators like moving average price and moving average convergence divergence (MACD), to ensure that your trading position is in accordance with these indicators. Always check contract specifications to find out the trading hours of the contract, contract months as well as the last day of trading. You will gain experience when you actually trade futures. As always, there are high chances of incurring losses, if you are a beginner trader . Therefore, it is advisable to trade with a practice account first in order to gain sufficient knowledge and experience before real trading. The price movements and data available in practice account are real-time; hence, you will gain hands-on knowledge and experience without losing any money. After getting acquainted with the futures market, start with a small investment; this will limit the amount of loss. Trade in a disciplined way and don't panic even if you lose in a particular trade. Analyze your strategy and make necessary changes, if any. After a period of time, you will be able to earn decent money, and you will never wonder, "What is futures trading?" like a beginner again. Stock & Commodity Trading