What does trading ‘futures’ mean?

In trading, we’re always looking to the future – whether it’s the next couple of minutes/hours, as is the case for those who scalp and short their assets, or months and even years at a time for those with a longer-term view on their stocks and bonds.

That theme continues when trading in ‘futures’, a term you may have heard in the past without really knowing what it means.

Futures are a very specific way of trading commodities and resources. While not for everyone, this is a style of trading that can yield outstanding results for those armed with a crystal ball, who use the raft of online trading info available to them and who enjoy a slice of good fortune!

So let’s take a closer look at futures, and whether this is a trading strategy that is suitable for you.

What are futures?

To use the accepted definition, futures contracts (often abbreviated to just ‘futures’) are agreed between a buyer and a seller, where the buyer will acquire a tradable asset at a predetermined price and at a specific time in the future – hence the name. 

Futures contracts are known as ‘derivatives’ because profit and loss is made from the underlying value of the asset, rather than any ownership being taken by the buyer. 

In what can I buy futures?

There’s a huge suite of assets and commodities that can be traded in futures contracts.

Stocks, bonds, and forex all allow buyers and sellers to take a position. Also, there’s a growing demand for futures in ‘physical’ commodities, too, from gas, oil, and electricity to precious metals, grain, and even foodstuffs like beef and cocoa. 

What is the difference between futures and options?

Remember the definition we gave of futures contracts earlier in this article – the agents in a futures agreement (i.e., the buyer and the seller) are legally obliged to fulfill the terms of the deal on a specified date in time. 

However, with options, you have the right to buy or sell the asset upon the expiry date of the term. So, having the right to do something and being obliged to do it are two very different things indeed.

Pros and cons of futures contracts

The main advantage of trading futures is, ironically, also the chief drawback of them – you are locked into a specific price of sale at an agreed time.

So, if you correctly call the future price of the commodity in question, you can bank a significant profit for that – however, if the value moves unexpectedly, you are duty-bound to satisfy the contract despite the loss you will be facing.

It is worth noting that futures use initial margins to calculate how much you will need to invest to open a trade, which will be a fraction of the value of an asset. However, note that since futures use leverage, you do stand to lose more than this margin on occasion.

Futures trading strategies

In essence, trading futures is the same as any other sector of the market you may have explored in the past – you are speculating on the future price (be it a positive or negative move) of a specific asset.

For the most part, you will be a ‘speculator’ in the market, attempting to second-guess where the value of a specific asset is heading.

Open a position and buy, sell when your future reaches your desired profit point. What could be simpler? 

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