Futures Trading Education

Our goal is to give you an education on futures trading and show you how to trade futures profitably by using our daily trade call. Please read through the topics on the right to get a better understanding of futures and futures trading.

Introduction

Futures markets have been described as continuous auction markets and as clearing houses for the latest information about supply and demand. They are the meeting places of buyers and sellers of an ever-expanding list of commodities that today includes agricultural products, metals, petroleum, financial instruments, foreign currencies and stock indexes. Trading has also been initiated in options on futures contracts, enabling option buyers to participate in futures markets with known risks.

The primary purpose of the futures market is to provide a mechanism for the management of price risks. Futures contracts establish a current price level for items to be delivered in the future. This allows a business or individual the ability to buy or sell contracts today and achieve a type of "insurance" or "hedge" against adverse price changes in the future.

Volume has increased from 14 million futures contracts traded in 1970 to 179 million futures and options on futures contracts traded in 1985.

There are two types of market participants. Hedgers and speculative investors. The speculative investor takes on the risk that the hedger is trying to avoid. Typically, the speculative investor is seeking to profit from a change in price in the commodity and has no intention of making or taking delivery. They buy when they anticipate rising prices and sell when they anticipate declining prices in the commodity. It takes both types of participants to provide the active, liquid and competitive markets.

For those individuals who fully understand and can afford the risks which are involved, the allocation of some portion of their capital to futures trading can provide a means of achieving greater diversification and a potentially higher overall rate of return on their investments. There are also a number of ways in which futures can be used in combination with stocks, bonds and other investments.

Speculation in futures contracts, however, is clearly not appropriate for everyone. Just as it is possible to realize substantial profits in a short period of time, it is also possible to incur substantial losses in a short period of time. The possibility of large profits or losses in relation to the initial commitment of capital stems principally from the fact that futures trading is a highly leveraged form of speculation. Only a relatively small amount of money is required to control assets having a much greater value.