Learn the basics of futures trading 101, how to get started with a futures broker, different trading strategies as well as the history of the futures and commodities markets.
A futures contract, quite simply, is an agreement to buy or sell an asset or underlying commodity at a future date at an agreed-upon price determined in the open market on futures trading exchanges.
It's important to understand that futures contracts are standardized agreements that typically trade on an established exchange. One party to the standardized contract agrees to buy a given quantity of an underlying commodity or an equity index for example, and take delivery on a certain date. The other party agrees to provide it or make delivery of the underlying asset.
This standardized contract agreement in futures trading may be clear, but how does one invest in futures trading?
A futures trader can initiate a long or short futures position depending on the anticipated move by the speculator on the price of the trading futures contract. This is accomplished by simply buying, "going long" or selling, "going short" a single or several futures contracts. When initiating a long position, the trader is anticipating an upward move in the price of the futures contract. The opposite is the case with a short futures position. The trader or speculator is hoping for downward price action in the chosen futures contract.
It's important to keep in mind that trading futures is very risky; a full risk disclosure can be found at the end of this article.
In addition to commercial hedgers, (which will not be covered in this particular article) there are also people/parties who act as speculators and who seek to make money off of changes in the price of the contract itself, when bought or sold to other investors. Naturally, if the price of a given futures contract rises, the contract itself becomes more valuable, and the owner of that contract could, if he/she chose, to sell that contract to someone else who is willing to pay more for it. This would be known as a long position in a particular futures contract. It is also possible to take on a short position and speculate on the price of the underlying futures contract going down and offsetting the position by buying back the exact same contract on the same exchange with the hope of making a profit on the change in price. These futures contracts aren't just bought and sold over a single market segment, but over almost any asset that's commonly traded. Commodities themselves do indeed represent a large percentage of the futures trading world: Futures contracts are issued on many underlying assets: eggs, gasoline, ethanol, lumber, equity indices, financial contracts and precious metals. The list goes on and on. All of these commodities have standardized futures contracts and speculators and traders are constantly seeking profit making opportunities, while hedgers attempt to lock in favorable future trading price levels in the present trying to avoid risk.
As implied above, the commodity futures trading markets are not simply all about hogs, corn and soybeans. One can trade equity indices and futures contracts on financial instruments. Some traders trade these vehicles extensively because of the greater potential for leverage than could be garnered by trading these instruments outright on the world's equity markets. Leverage in the futures trading markets is denoted by the substantial position that can be initiated in an underlying commodity while putting up a relatively small amount of cash margin. A trader or speculator needs to be aware of the double-edged sword this implies: while the potential for greater profits exists, so does the increased risk of very large losses in the commodity futures markets. The understanding of leverage and the risks that inherently come with it, is paramount before initiating any positions in the commodity futures markets. No one can claim to know how futures trading works without a firm mental grip on these important futures trading basic mechanics.
For beginners, the term contract can, at first glance, seem cold and uninviting, but it is consciously used because, like any other legal binding contract, a futures investment has an expiration date and standardized features. You don't have to hold the contract until it expires. You can cancel it or offset your position any time you would like before expiration of the contract. In fact, many short-term traders, known as day traders, only hold their contracts for a few hours - or even just for minutes!
The expiration dates for various futures contracts vary between commodities, and you have to choose which markets and futures contracts fit with your futures trading objectives.
As a general commodities futures trading rule, the nearer (to expiration) contracts are usually more liquid, i.e. there are more traders trading them and there is inherently more trading volume therein, which is referred to as liquidity. The limitation on the number of contracts you can trade (within reason - there must be enough buyers or sellers to trade with you) is governed mainly by your account balance and the amount of futures trading margin you can bring to the markets. It just so happens that larger traders/investment companies/banks, etc. may trade thousands of contracts at a time in different futures trading markets. These larger positions must adhere to CFTC position limits and reportable position rules.
As outlined above, all futures contracts are standardized, in that they all hold a specified amount and quality of a commodity. For example, a Silver (SI) futures contract holds 5,000 troy ounces of silver, a Gold futures contract (GC) holds 100 troy ounces of 24 carat gold; and a Crude Oil (CL) futures contract holds 1000 barrels of crude oil of a certain quality that is standardized and specified in the futures contract itself.
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Before you get started Futures Trading or Commodities Trading, make sure you educate yourself with trading futures beginners guide, learn an online commodity futures trading platform, and get to a known commodities broker. Download a free futures trading software from Cannon Trading.
So you've come this far. You've evaluated different vehicles of investment, and you have decided to expand your portfolio to include commodity futures trading, Now what? You are going to need a few tools at your disposal: a knowledgeable commodity broker that is quick on their feet, a reliable, efficient platform that will get you the information you require and executes your trades on a timely basis, and perhaps most importantly a commodity futures trading plan.
Let's begin with the most important requirement: because futures are so highly leveraged (if you are holding one contract of the E-mini S&P 500, the notional value of the futures contract is 50x the current index price), there's no doubt it can be a very risky asset class and you should only be trading with "risk capital", or money that you can stand to lose and won't affect your lifestyle if you do. Once you've accumulated your risk capital and you've come to terms with the nature of trading futures & commodity, you can take matters a step further by doing research on what kind of trader you want to be.
One of the most difficult aspects of futures trading is coming to terms with one's own skill set; what are the characteristics of my trading? What are the flaws and finer points of my trading? Is day-trading the E-mini S&P 500 something I was cut out for, or does my personality gear me more towards swing-trading the grains?
Our future brokerage firm has been in the same location in Los Angeles, California since 1988 and has the experience and tools to help you achieve your trading futures goals. We offer most of the platforms available in the industry today and it affords us the opportunity to provide an objective, comprehensive point-of-view when helping you choose your execution platform. Whether it is the user-friendly nature and execution of the Firetip platform, the indicator-specific trading of the SierraCharts platform, or the automated risk management feature of TransAct AT, we can assist you figure out what it is that you need to help you increase your chance of success.
Every platform is different, even if they look similar. Depth of Market (DoM) trading has many subtle differences between platforms, and we're more than happy to share which ones we think are best. Also, the markets you're trading are very important to the platform you are going to be executing on; for example, some platforms we offer are not capable of trading Options on Futures or Forex, while some platforms we carry can handle it all. Some platforms are capable of trading Asian markets, while some platforms deal only with a handful of markets. Again, this is where talking to one of our brokers comes in handy.
Navigating the futures trading markets is not understood overnight. It can often take years of preparation and research, and you can never learn enough patience when your trading live. Just as paramount as any other prerequisite for trading futures is a proper commodities futures trading psychology: one that will allow you to determine the difference between pain tolerance and denial, between responsible targets and greed, and a mindset that won't force you to keep trading when it's time to step away from the computer.
There are many commodity futures trading strategies that can be employed; several of these methods and brief descriptions can be found below:
Spread Trading - A type of trade where a single position in the market consists of the simultaneous purchase of one futures contract and sale of a related futures contract as a unit.
Options on Futures - The purchase or sale of derivative instruments that grant the trader the right, but not the obligation to execute a trade on underlying futures contracts.
Day Trading - Day trading consists of entering futures positions and exiting those same positions within the course of one day's session.
Position Trading - Denotes holding a position for a longer period of time that may involve hours, or even a few days or longer.
Scalping - Scalping involves the very fast execution of trades in hopes of taking advantage of small and frequent price changes.
Swing Trading - Swing trading is a type of position trading that attempts to capture potentially larger price movements than those involved in quick scalping futures trading strategies.
Momentum/Breakout Trading - Here a trader looks for a narrow trading channel or trading range where volatility has diminished. The goal is to establish a position as price breaks out of this trading channel concurrent with a spike in open interest, thereby taking advantage of the increase in volatility and catching a strong trend move.
Trading futures spreads, there are important reasons why spread trading should be considered if you're looking for an approach / guide to trading futures.
"A basic and important strategy for commodities traders using spread trading."
Over my 20+ year career as a commodities broker, I have studied and traded a wide range of approaches to trading the futures markets. From candlestick formations to the commodity channel index, from condors to turtle trading, there's an enormous catalog of tools and methods available for traders to consider.
One method I have noticed is surprisingly under represented among retail traders is futures spread trading, where a single position in the market consists of the simultaneous purchase of one futures contract and sale of a related futures contract as a unit. I call it surprising because some of the most invested players in futures trading - and arguably the most sophisticated - include large speculators and commercial firms who regularly employ spreads. This includes traders in the markets who often actually buy and sell the physical commodities we trade. Farmers, ranchers and other food growers along with food producers, petroleum companies who either drill for oil or natural gas or refine these products - or both, financial institutions with enormous holdings in treasuries, equities or currencies, mining interests and their buyers - all these areas of production and distribution employ futures trading spreads from time to time as an important aspect of their businesses. Indeed, spread trading futures is a fundamental and essential part of the commodities futures markets.
At the same time, despite the remarkable increase in interest and in the growth in the volume of the futures markets over the years, spread trading is typically dismissed by most other traders in search of a futures trading strategy. With so much attention focused on other approaches related to straightforward directional trading (and within that category, day-trading) it's not difficult to see how spread trading futures can be overlooked.
Spread trading futures can also be challenging to figure out anyway. On the surface, buying July soybeans and selling November soybeans, for example, might look like a downright futile endeavor.
But there are some important reasons why spread trading should be considered if you're looking for an approach / guide to trading futures.
Lower Volatility: many futures contracts can be extremely volatile, not just during their U.S. daytime trading hours, but during those night time hours when the preferred activity for many traders is sleep - and futures trading volume can be greatly reduced. Certain types of spreads can greatly reduce volatility risk for futures positions and be a viable substitute for placing stop orders. In this case, a spread might enable you to withstand the "surprises" that often appear when you rise to a new day.
Less margin: because of the lower volatility, the exchanges set margin requirements for many futures trading spreads that can be much less than an outright futures position. For example, the current initial margin requirement for July soybeans is $4,590. The current total initial margin requirement for the July soybean / November soybean spread mentioned above is $2,700.
But, why bother educating one's self on the inner workings of futures trading spreads? What advantages come with lower volatility and lower margins? Those qualities by themselves don't very strongly suggest futures spread trading is worth pursuing. Buying an out-of-the-money futures option for $200, after all, is also low in volatility and risk.
Well, consider this: those same large speculators and commercial firms who regularly employ spreads - again, some of the most invested and arguably the most sophisticated players in futures trading - are often employing spreads based on market conditions and events that recur at periodic intervals.
Maybe the most obvious of these intervals is the cycle of weather from warm to cold and back to warm. For agricultural and energy futures markets, weather - more accurately the seasons - can have an important effect on price movement. For example, enormous supplies of soybeans, once harvested, dwindle throughout the year. The same goes for other agricultural commodities such as wheat, corn, sugar, and cotton.
Seasons and weather changes affect energy prices as well. Demand for heating oil typically rises as cold weather approaches but subsides as refiners meet the anticipated demand. Memorial Day typically marks the beginning of the "driving season" in the United States and similarly, a vast number of the rest of the world's population prepares to "go on holiday." As a result, gas consumption rises.
Seasons and weather changes aren't the only cycles affecting the markets. Cycles in the financial arena can affect related futures trading markets. Consider how a nation's fiscal year and tax due date is often at variance with others who are important trading partners. That can influence currency flows and the forces on interest rate-sensitive instruments.
All these forces, though certainly not 100% predictable, give rise to recurring price phenomena - to greater or lesser degree and in a more or less timely manner - and reveal a tendency for prices to move in the same direction at a similar time every year.
Spread trades can take advantage of these types of cycles. Consider this: Market-driven U.S. interest rates historically exhibit a strong tendency to reach a seasonal high around April/May - presumably when monetary liquidity is tightest after the massive transfer of financial assets from out of the private sector and into the public sector - in the form of income tax payments due April 15. At the same time, the long June 10-year Treasury note / Short June 30-year Treasury Bond spread has closed in favor of the 10-year note between February 8 and April 17 in 17 of the last 19 years!
And how that spread found itself into this article leads me to the heart of the article: where can you find out more information about futures spread trading?
They may be harder to find, but there are some very good sources of research on futures spreads available for your investigation. My personal favorite is Moore Research Center, Inc. (www.mrci.com). They're responsible for the description and record keeping of the interest rate spread I just cited.
Although spread futures trading represents an important slice of the overall trading volume in the futures markets - and is used as a futures trading strategy by some very sophisticated participants, I see it as an approach worthy of investigation by futures traders more broadly, including most of our readers. Even if spread trading futures can take on the directional characteristic of straight futures trading, it is certainly an overall different approach and that can be the trading futures strategy diversification you're looking for.
As is always the case when we share trade proposals of this sort, we want to make sure we square up our discussion with the always-important information. Spread trading like all futures trading, isn't without its risks. Even with regard to the annual cycles referenced above, which will inevitably ebb and flow both daily and longer term - no spread works every time. Just look at how some summers are hotter and dryer - and at more critical times - than others for an example of what can affect a grain, livestock, energy, possibly even another type of futures trading spread. Make sure you're aware of the risks to trading futures spreads as you should with any futures trade.
Gold & Silver Spread
A spread usually comprises of multiple futures related positions. If we have to recognize the spread for margin purpose, there needs to be an economic connection between its constituents. Gold and silver are fellow traveling precious metals; however, formally recognizing the spread by exchanging clearing house is needed if we have to derive the spreads benefits. In most of the cases, the benefit is reduced margin requirements.
Selling Gold against Silver purchase wagers on an improvement in silver's buying power, whether it derives from a rise in silver's price or a decline iThere is a variety of "Spread Trading Software" that can help you analyze your trading needs gold's. A spread, therefore, gives you an opportunity to profit regardless of overall market direction.
Day Trading Crude Oil Spreads
The price of crude oil is a vital global economic factor. This means that day trading is often influenced by political and commercial concerns. If the price of oil remains high over a period of time, cost of products like fertilizers and plastics are also inadvertently affected.
Crude oil futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of crude oil (e.g. 1000 barrels) at a predetermined price on a future delivery date.
Wheat futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of wheat (e.g. 5000 bushels) at a predetermined price on a future delivery date.
Producers and consumers of wheat can manage wheat's price risk by buying or selling wheat futures. Producers can deploy a short hedge to lock in selling price for the wheat they produce while the businesses that require the wheat can make use of long hedge to secure a purchase price for the commodity needed.
There is a variety of "Spread Trading Software" that can help you analyze your trading needs.
Trading is truly a fascinating pursuit. The markets can in still excitement, frustration, irritation, exhilaration - really a wide range of emotions - conceivably, even within a single trade. Trading is definitely one of those undertakings where one has to constantly study, evolve and grow.
There are also a number of different approaches to trading, including day trading, swing trading and position trading. There are strategies that focus on just trading straight futures contracts, others solely trade options, including selling/writing options, still others incorporate long and short positions simultaneously - spread trading - utilizing futures and/or options.
One narrowly defined approach to trading - probably most relevant for day traders - is trading around economic reports.
The release of economic reports occurs almost daily. Most come from the U.S. federal government and look at national or large regional data; some come from other private surveys. Some garner considerable attention by traders; others draw barely a thought, much less a glance at their impact on the markets. This article doesn't attempt to detail any particular number of them and their significance. Rather, it lists some pointers that can help traders prepare for reports releases.
1. Know the times reports are set for release
2. Know which markets reports may impact
3. Know what the markets are expecting and how different outcomes will affect market movement
4. Do your homework, i.e., go over charts from earlier dates when similar reports were released.
5. Keep a journal. Focus on the reports that affect the markets you trade. In general, I like to know what the market expects, observe the market's reaction to the actual data, let the initial strong move occur and then if there is a clear direction, I like to try trading the second wave. That means if I am looking to go short, I would give the market time, take a look at price action and wait for higher prices to go short. It's possible I may miss the trade but I prefer to be rather conservative and follow the thinking that "no trade is better than a bad trade." Another way more experienced traders can play major reports is by placing limits to both buy and sell at points they consider are the outer ranges for the short time frame. One must be experienced enough and understand the many factors and risks in trading during major numbers and know how to send attached orders.
6. If you trade energies, you should know that Wednesday morning at 9:30 A.M., Central Time a key weekly report is released. If you trade natural gas, Thursday morning at 9:30 A.M., Central Time is similarly worth keeping an eye on.
7. The financial markets (Treasury Bonds & Notes) are probably the markets most influenced by economic reports, such as Non-farm Payrolls/unemployment, housing starts, permits and home sales, Producer & Consumer Price Indexes, Consumer Confidence and others.
8. There are a few great sources on the web that will list these reports and their meaning, including some free sources as well as paid services. The latter often provide real time updates and commentary.
9. The vast majority of these reports are regularly scheduled weekly or monthly. Others, such as Federal Open Market Committee events occur every 6-8 weeks. Do your homework.
10. Last but not least, do not enter a trade with the idea that you'll just get in and see how it goes. Risk levels, potential targets, in other words, a game plan should be considered BEFORE you enter the trade!
11. I will expand on this topic in future articles and write specifically about certain reports, the markets they affect, and more. Until then, don't just jump in and start trading economic reports. Talk to a series 3 professionals at Cannon Trading Co, Inc. who can help you understand more, provide you with an honest outlook of both the risks and opportunities and who can help you devise a game plan!
Before the advent / history of futures trading, any producer of a given commodity (e.g. a farmer growing wheat, soy or corn) often would be at the mercy of a commodity dealer when it came to selling his product at his/her desired price level. It became of great advantage to a commodity producer when he/she could participate in a system of commodity futures trading exchanges that outlined a specified amount and quality of a commodity product that could be traded between producers and dealers at a specified date. This helps to eliminate some, but not all, of the prevailing price risk facing commodity producers. It also helped to build a more liquid market environment for the commodity producers themselves.
Again, before the creation of the commodity futures trading markets, contracts were drawn up between the two parties specifying a certain amount and quality of a commodity that would be delivered in a particular month...these were known as forward contracts and were not the standardized commodity futures trading contracts we know today.
In 1878, a central dealing facility was opened in Chicago, USA where farmers and dealers could deal in 'spot' grain, i.e., immediately deliver their wheat crop for a cash settlement. Commodity Futures Trading evolved as farmers and dealers committed to buying and selling futures contracts of the underlying commodity.
Perhaps surprisingly, until only about forty years ago, trading futures markets consisted of only a few commodity farm products, however, now they have been joined by a huge number of tradable financial and other tradable products such as precious metals like gold, silver and platinum; livestock such as hogs and cattle; energy contracts such as crude oil and natural gas; foodstuffs like coffee and orange juice; and industrials like lumber and cotton.
And as stated previously above, modern commodity futures markets include a wide range of interest-rate instruments, currencies, stocks and other indices such as the Dow Jones, Nasdaq and S&P 500.
Trading commodity futures and options involves substantial risk of loss. The recommendations contained in this letter are of opinion only and do not guarantee any profits. These are risky markets and only risk capital should be used. Past performance is not necessarily indicative of future results.
For beginners, futures traders can also check detailed comprehensive trading futures market insights and strategies in commodity futures trading through our educational resources, articles, other Beginner's Guide To Trading Futures which are mentioned below:
• Beginner's Guide To Options Futures Trading
• 8 Steps to Successful Beginner's Guide To Trading Futures
• Top 50 Beginner's Commodity Futures Trading Strategies
• Beginner's Guide To Trading Futures Market
• Beginner's Guide To Day Trading Futures
• Beginner's Guide To Survivor Day Trading
* Past results are not necessarily indicative of future results. The risk of loss in futures trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
** SEASONAL TENDENCIES ARE A COMPOSITE OF SOME OF THE MORE CONSISTENT COMMODITY FUTURES SEASONALS THAT HAVE OCCURRED OVER THE PAST 15 YEARS. THERE ARE USUALLY UNDERLYING FUNDAMENTAL CIRCUMSTANCES THAT OCCUR ANNUALLY THAT TEND TO CAUSE THE FUTURES MARKETS TO REACT IN A SIMILAR DIRECTIONAL MANNER DURING A CERTAIN CALENDAR PERIOD OF THE YEAR. EVEN IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT IN A PROFITABLE TRANSACTION AS FEES, AND THE TIMING OF THE ENTRY AND LIQUIDATION MAY IMPACT ON THE RESULTS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT HAS IN THE PAST OR WILL IN THE FUTURE ACHIEVE PROFITS UTILIZING THESE STRATEGIES. NO REPRESENTATION IS BEING MADE THAT PRICE PATTERNS WILL RECUR IN THE FUTURE.
Have you noticed the tendency of stock market analysts to define a “correction” in any of the major stock indexes as one of 10% or thereabouts? It’s as if that measurement defines a meaningful move to pay attention to – either as a point at which a recovery might ensue or a sign of further downward prices (they invariably hold their tongues in lieu of uttering a prediction).
Well, compare that "correction" with some of the price moves by some of the major markets traded all over the world:
Just within the last four months, copper prices have dropped 22%. Sugar prices have dropped 37%. Cattle prices have increased 12%. Gold prices have dropped 12%. Lumber prices have dropped 45%.
Of course, these are just some of the commodity futures contracts traded every day – on some of the oldest and largest exchanges in the world. Others futures contracts include stock index futures (S&P 500, Dow Jones, Nasdaq), financial futures (30-yr. Treasury bonds, 10-yr. T-notes), currencies (i.e., Euro, British Pound, Japanese Yen, Swiss Franc) and grain futures (Soybeans, Wheat, Corn).
The price moves noted above offer traders opportunities that are unique along the risk scale.
Compared to the majority of assets you can trade, futures contracts have particular feature to them. This involves the means by which futures contracts are traded. Instead of requiring a financial commitment equal to the value of the asset, for futures contracts only a fractional commitment is required. This is the concept of leverage. For example, the standard futures contract available for trading gold is equal 100 ounces of the metal. If gold is valued at $1,250 per ounce, then one hundred ounces would be worth $125,000. However, it is allowable to enter a position in gold futures for a fraction of that. Currently, that allowance, called margin, is $3740 and is set by the COMEX exchange on which gold is traded.
The effect of leverage is that a change in the price of one hundred ounces of gold results in a magnified change in the value of the leveraged futures contract. For example, a $10 move up in the value of a 100-ounce gold contract increases our $1,250 per ounce / $125,000 amount of gold by $1000, or approximately 1%. But that’s also a $1000 increase in the leveraged $3740 allowance; a 21% increase. This magnifying effect on the price change of an asset sets futures trading apart from most other types of trading.
Another important difference in futures trading is that buying futures – expecting a price increase, or selling futures – expecting a price decrease, are equally allowable with the same margin requirement. In other words, taking a long or short position in the market provides equal opportunity and equal risk.
And trading futures not only calls for an understanding of the rewards and risks involved, it requires a trading account. Whether you choose to open a self-directed futures trading account, or one where a broker supports you in your trading – in some large or small way – there are several important factors you should consider. Everything a brokerage firm offers (or doesn’t offer) comes at price. That price is pretty much boiled down and quoted in terms of what’s charged when you make a trade: the commissions and exchange fees – and maybe a short list of other costs. But choosing a futures broker by simply comparing the “bottom line” of commissions can be hazardous to your trading.
Benjamin Graham, an influential economist and professional investor is credited with saying, “Price is what you pay; value is what you get.” The commissions a brokerage firm charges typically provides for a wider range of services and resources beyond just trade execution and it’s important you know what those include and if they’re important to you or not. You might want to consider the features of your trading platform (i.e. its charts, ability to integrate with automated trading systems or other software), the availability of your broker, his/her experience or any area(s) of specialization, the support the clearing firm provides, the clearing firm’s day-trading margins, whether the clearing firm is staffed with an overnight desk, etc.
There are three fundamental strategies that futures traders employ: going long, going short, and spreads. Learning them can help a novice investor become successful when engaging in commodities. Education in the various aspects of the industry is necessary in creating profits and avoiding financial loss.
When going long, a trader buys a contract in the hope that the value will increase in the future. He keeps the contract for a relatively long period in anticipation of a favorable price change.
When going short, the investor is betting on the opposite. The commodity will decline in price as time passes. He sells or shorts the futures contract when the price is currently high and usually seeks to buy it again at a lower price point in the coming months.
Long and short positions involve buying or selling futures contract to take advantage of price fluctuations. Unfortunately, no one can accurately predict the future and the risks are large. Spreads can reduce the uncertainty; instead of entering into a single futures contract, investments are spread into multiple contracts with contrary positions. Calendar spreads are an example of this type of strategy, and involve the simultaneous purchase and sale of two contracts of a single commodity with different delivery dates. Investors seek a profit from the difference between the two positions.
For new investors, going long, short, or trading in spreads can be a confusing experience. Fortunately, novices can seek advice from a broker. The broker can recommend different strategies and types of spreads, which an investor can adopt until he learns to create his own personal trading strategies. The broker can also recommend tools, such as trading software, which will help an investor analyze market trends and the behavior of various commodities.
One of the ways a broker might recommend that commodities traders minimize the risks involved when dealing in commodities futures is to engage in futures options trading
Unlike a straight futures contract, a futures option gives the trader the right to buy or sell a commodities contract at a predetermined price. Trading in futures options is an effective strategy to limit risk and leverage. When a trader purchases a futures option, his losses are limited to the price paid for the option. On the other hand, it allows the trader to control a more expensive asset or commodity without having to purchase it outright, as is the case in a conventional futures contract.
There are two types of options available: "call," and "put." Call options give the holder the right to buy a commodity at a given price, while Put options give the right to sell the underlying commodity. Essentially, the options holder has right to buy or sell, while the other party has the obligation to buy or sell. Call and put options can be exercised by the options holder before, or even during the contract expiration date.
Buying call options is a good move for traders who believe that the price for a particular commodity will rise within a certain period. Because they can choose not to exercise their right to buy, or exit the option before the contract ends, they run a much lower risk compared to a straight futures contract.
This is also true for traders buying Put options. If the price of a commodity falls below a certain strike price, they have the right to sell their commodity futures contract to a seller with minimal loss on their end.
While futures trading options can help minimize trade risks, it's important to remember that on its way, options trading can still lead to a loss, particularly if a trader doesn't use any other strategies to complement their trading. In order to be in a better position to profit from the commodities market, it's important to do keep updated on emerging market trends and events.
Understanding the basics of futures trading enables new investors to increase their chances of earning. Premium and discount futures are brokers' terms which describe the state of a particular futures contract. When a future is at a premium or a discount, an investor can use an appropriate strategy to maximize gains.
Premium and discount futures describe the relationship of a commodity's price with the spot price. The futures' price is the expected cost of the contract when it matures, while the spot price refers to the cost of the contract on the exact moment of trade or "on the spot." It can also be said that the futures' price is the spot price at the date of maturity. When the spot price is lower than the futures' price, it's termed a premium future. When the opposite occurs and the spot price is higher than the futures' price, then it's a discount future. This situation can also be called a contango, while the opposite can be referred to as backwardation.
When a future is at a premium, it generally indicates near-term demand. It is likely that it will trade higher in the coming trading sessions. Premium futures offer a buying opportunity, especially when an investor takes a long position. This situation can normally be found for non-perishable commodities with a cost of carry.
At the other end, discount futures indicate that supply is greater than demand. The market will probably correct itself soon, and a wise investor must be prepared to short sell.
While these general strategies are effective, the trick in maximizing earning potential lies in knowing when to exactly buy or sell. An investor can try to compare historical trends. Some trading software can provide convenient access to historical data, enabling investors to make an educated guess.
However, futures trading is incredibly complex. Exceptions to trends can easily appear. New investors are advised to contact an experienced futures broker for comprehensive advice while learning the ins and outs of investing in this exciting financial instrument. There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past performance is not indicative of future results.
Another popular form of futures trading is Gold. Trading in gold futures can provide investors a viable alternative to investing in physical gold bullion, and a useful hedge against inflation. As a commodity, gold offers a number of benefits over other investment classes, including deeper market liquidity, greater leverage, and the option for physical delivery on the contract, among others.
Gold holds an almost universal appeal due to its rarity, versatility, and beauty. Many individual investors physically buy gold coins and bullion as a way to avoid the uncertainties of inflation, and the volatility of other asset types. However, physically trading gold can pose many problems for investors, which makes trading in gold futures a much more viable option for individuals who wish to break into this market.
A gold futures contract is a commitment between traders to deliver, or take delivery of, a quantity of gold on a specific date at a specific price. As with other commodities, gold options contracts are also available, giving traders the right to deliver, or take delivery of the commodity without the obligation inherent in a futures contract.
An important advantage to trading in gold futures is the fact that because they are traded at centralized exchanges, futures contracts offer more financial leverage, flexibility, and financial integrity as opposed to physically trading this precious metal. Traders only need to put up a percentage of the contract cost, which means that a considerably smaller capital is required compared to a physical trade. Of course, this leverage means that there is the potential for higher risk and higher returns when trading in futures contracts.
As one of the leading commodity brokers in the industry, Cannon Trading has helped clients all over the world achieve their trading goals. We have been in business since 1988, and have received several customer service awards, and consistently maintained good standing with the NFA and CFTC.
For over 20 years, Cannon Trading has helped clients all over the world achieve their trading goals in the lucrative commodities futures trading market. Day trading futures can be overwhelming for newcomers who are just venturing into the field, but with the help of a professional, traders have a better chance of achieving success in the field of commodities trading.
Our professional commodities brokers will work with you to understand your specific trading style and requirements, and provide you the essential advice and information you need to thrive in this highly lucrative market.
Cannon Trading's Broker-assisted Trading solution provides traders who are new to the field with the essential advice and tools they need to accelerate their understanding of the gold futures market or any other futures market they desire to trade in.
Cannon Trading specializes in trading U.S. treasury bonds, stock indices, foreign currencies, precious metals, crude oil, agriculture, and other products on the futures and commodity exchange, including futures options. Our brokerage services are designed to help traders acquire the knowledge and resources they need to engage in commodities trading.
Investors who are new to the commodities market can take advantage of the knowledge and experience of our Broker-Assisted Trading program. An experienced futures broker can provide invaluable advice on the various commodities markets, and help traders gain insight on possible strategies and trading styles to maximize their investments. Aside from the assistance of a professional broker, we provide access to quotes, charts, news, and research to help clients make informed trading decisions.
More experienced traders who want to have fast and efficient market access can choose our Self-directed Online Trading service. We offer a wide variety of trading platforms to suit our clients' individual trading styles and risk tolerance. From clients who primarily engage in day trading futures, to diversified traders and options specialists, we have the tools and resources you need to achieve your trading goals. Self-directed traders enjoy very low commission rates and have access to invaluable resources, to help ensure that they have the latest market information they need for successful trading.
Aside from helping individual traders break into the commodities market, Cannon Trading provides professional traders and institutions superior trade and clearing services. We can create trading solutions designed to fit the needs of institutional futures traders. Aside from offering more than 10 trading platforms, we have the ability to custom-fit back office solutions, and manage risk for multiple traders. We also offer aggressive commissions and day trading margins, as well as the lowest available commission rates for our high-volume traders.
Futures trading can be complex and risky, but with broker assistance, a trader can prepare himself for success. Brokers at Cannon Trading are experienced, knowledgeable, and available whenever you need them.
You and your broker will work together to achieve your trading goals. We develop long term
relationships with our clients so that we can grow and improve together.
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