Posted By: Ilan Levy-Mayer Vice President, Cannon Trading Futures Blog
Considering Futures Commodities Trading?
What is FCT? When buying futures you are entering into what is called a futures contract. This contract is an agreement to buy or sell the commodities at a fixed price at a later date. The fixed price is determined by the commodity profile of the exchange upon which you are trading. The commodity profile determines what is called the contract size. By using various strategies on the exchange you can profit or lose from either a drop or an increase in the price of the underlying commodity. There are two core positions you can take when trading futures, long and short depending upon whether you think the price will rise or fall. The advantage of trading in futures is that your investment is only a percentage of the price of the value of the contract, this is buying on margin. Typically, margins are anywhere from 3-20%.
The strategy is then to gain an increase on your margin investment based upon the daily price fluctuation of the underlying commodity. In taking a long position you agree to buy the contract at a later date at the fixed price with the option to sell early in the event the price per share goes up, adding to your margin. In taking a short position you agree to sell the contract at a later date with the option to buy back the contract at its decreased value in the event the price per share goes down, again, adding to your margin investment. Traditionally, what is described here is the process of two interwoven financial instruments; options contracts and futures contracts. The two are distinguished by the obligations put on the buyers and sellers.
Whereas futures contracts obligates the buyer to buy and the seller to sell unless the holder’s position changes prior to the set delivery date, the options position holds that the buyer has the option, yet is not obligated to, buy or sell the contract at a set price at any time during the duration of the contract up until expiration. Another feature contributed by the options position is the marginal investment, also known as a performance bond. Both long and short position holders are required to contribute this security deposit to ensure their position on the contract. Depending upon the daily market fluctuation of the price of the underlying commodity, the performance bond acts as a leverage vehicle that credits and debits a trader’s account on a twice daily basis from the pre-deposited funds. A broker may also perform a margin call to the client when the margin investment account falls below predetermined performance requirements set for the contract. Singular positions on futures contracts, in and of themselves are the riskiest investments in futures trading. Certain strategies can be employed to minimize risk and maximize returns on marginal investments. Another way to hedge you against unfavorable changes in the market is by utilizing a spread. One spread is to go long a nearby month and go short a later month. Another spread is to utilize related commodities/ contracts. Long wheat, short corn or long ten year bonds, short 30 year bonds. More on commodity spreads at: https://www.cannontrading.com/community/trading-futures-spreads.
Who Is It For? Many market participants need the futures markets for their core business. Farmers, food processing companies, energy companies, speculators and investment traders are all among those interested in capitalizing on either the favorable or adverse changes in market values in hopes of minimizing their risks through losses and inputs. Whether you are new to trading investments or are experienced in traditional stocks, futures trading can be a highly lucrative investment opportunity if you like the idea of speculating on various market changes but the large leverage also makes futures trading very risky.
Exploring the Different Platforms
Online Futures Trading platforms are worth a look. There are lesser commission rates associated with these accounts which can add up substantially through full service brokerage accounts. You also have full control over all trading decisions which provides a great learning curve opportunity if you are looking to become more market savvy.
Offline Traders who are just beginning are advised to consider a full service brokerage firm. Markets are volatile and the trading error can be costly. Not all firms are in the same category as expensive. A great brokerage firm understands the need to sustain a lifetime customer value and works closely with a client to structure a profile that is fair and most financially practical for that client. This type of platform allows you to work with a broker that can advise and help you understand different market types.
Opening Your Account
Assessing Your Needs It is ideal to familiarize yourself with various market exchanges to determine which is most beneficial to the amount of experience and knowledge you have of trading.
Determining Your Trading Goals It is important to determine for yourself both short and long term financial goals in consideration of your assets and net worth, to establish how much risk you can afford to take on.
Choosing Commodities Trading Brokers It is recommended that you approach Futures Trading Brokers or Commodities Trading Brokers once you have determined your affordable risk, needs with respect to various market types, and short and long term trading goals. Advocating this information to a broker is important in building your trading profile. You will then be provided with account forms, disclosure documents of annual income and net worth, as well as identification and accompanying paperwork.
How to Get Started?
Visit: https://www.cannontrading.com/services/traders-profile upon answering a few questions, you will be able to complete an account application online , wait for approval, wire funds and start trading.
Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.