How to trade futures: tips for future trading

Futures trading

Futures are digital financial contracts which enable you to agree on a price for an asset in the present, to be exchanged at a futures date. Often, the contract is between two parties, the buyer and the seller of the contract. The buyer pays up front and purchases a futures contract from the seller.

The seller agrees to sell the asset at some point in the futures according to predetermined terms. If it turns out that this commodity or security, has increased in value relative to what was originally agreed upon by both parties, then this is called "going long" or "long position". If it decreased in value, the term "going short" is used for describing it.

Reasons to trade futures

Leverage

Futures contracts are widely used to manage risk in the marketplace. It helps you to control your position. Futures contract is a type of derivative. Meaning that they derive their value from an underlying asset. They can be traded on the futures exchange or through a broker. The market exposure increases considerably when you trade futures because you are buying and selling at the same time. Your profit and losses will be determined by your position. Futures contracts are leveraged. That is, they allow you to take the improved market publicly for a small deposit – referred to as margin. Your futures provider can loan you the relaxation of the entire value of the trade.

When buying and selling with leverage, it is vital to consider that your earnings or loss could be determined by the overall length of your position, not simply the margin used to open it. This means that there may be an inherent chance that you can make a loss (or a profit) that outweighs your first capital outlay.

Avoid overnight funding charges

These are charges that get accumulated from trades that are not closed at the end of the day. With futures trading, these charges are rather included in spread. You don't have to incur multiple overnight charges with futures trading. So you can go for long term trading without being scared of these charges.

You can control your risk

This is called hedging. Hedging is the ability to control the degree of your exposure to risk. You can decide to go short or long, depending on the market trend. If there is much likelihood of losing, you could opt into short. And if there is a high likelihood of profit in the long run, you can go long.

Steps for trading futures