The Basics of Futures Trading

The Basics of Futures Trading

futures trading

Futures trading can be a profitable way to trade in the commodities markets. But it is also risky, especially for speculators.

A OnlineFuturesContracts specifies the exchange of a commodity for a specified price on a certain date in the future. It differs from options contracts, which have no underlying underlying assets and instead are traded against each other.

In the futures market, there are many types of contracts to trade including crude oil, wheat, corn, oats and even cocoa beans. There are also futures markets for indexes, currencies and interest rates.

The most common type of futures contract is the standardized exchange-traded futures. These are regulated by the central government and traded on exchanges that set the standards for each specific contract.

Risk Management in Futures Trading: Essential Strategies

Another form of futures is a forward, which is similar to the exchange-traded futures, but it has an underlying asset that is not traded on an exchange. The difference is that a forward has less credit risk and is not margined as futures are.

When a holder of a forward sells or buys a product, they must mark the product to market on a daily basis. This means that if the product has changed in price during the day, a partial payment will be made to the other party to reflect this change. This helps to mitigate the risk of default.

Futures brokers are typically more generous in terms of leverage and margin rules than their stock counterparts. They may allow you to use as much as 10:1 leverage, or a 20:1 ratio depending on the contract. But they do require you to deposit some money in a margin account as security against loss, which can be between 5-10 percent of the contract size.

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