Gaining more and more popularity, trading is an activity whose main purpose is to make profits. It consists of carrying out purchases and sales of different types of financial assets (currencies, shares, cryptocurrencies, etc.) on the financial markets.
Among these are the futures markets which have their own characteristics. It is therefore essential to know these financial markets well to avoid losing your capital and to make your investment profitable. To help you see things more clearly, here is everything you need to know about futures trading.
Futures trading: what is it?
Also called a “futures contract”, a future is a financial contract involving two parties who agree to buy or sell an underlying asset. The quantity of the latter is determined beforehand and the two parties agree on the price of the asset in advance. All operations must take place until a due date which must be respected.
In addition, the future makes it easier to anticipate variations in an underlying asset and boosts portfolio performance. It is also used as a hedge of the latter to counter future market fluctuations.
What are the different types of futures?
When it comes to trading futures or futures, there are trading opportunities in different contract sizes and different markets. Thus, futures trading offers traders the ability to trade in liquid markets and even smaller contracts. In this case, the purchasing power is increased and the financial commitment is reduced.
In addition, the underlying asset may be of several types. It may be, for example, an agricultural raw material (corn, soya, cocoa, etc.) or even a raw material such as gold, oil or natural gas.
It can also be an equity index (CAC 40, Dow Jones, etc.), a currency (Eurodollar), an interest rate (Bund, T-Bond, etc.) or of a cryptocurrency (Bitcoin, Ether). It is possible to trade cryptocurrency futures on Margex. Thanks to futures, you will have access to various underlyings.
How does futures trading work?
The functioning of futures trading is based on several parameters such as the margin deposit and the margin call. Indeed, during the purchase or sale, you must make a deposit which represents the insurance of the good end of the operations.
It should be noted that the purchase of futures corresponds to an anticipation of the rise of the underlying asset and the sale corresponds to an anticipation of its fall.
Then, the days following the market close, you will receive margin call notifications. They represent the losses or profits of your position, depending on the realization or not of your anticipation. In the event of good anticipation, you will therefore benefit from the margin call. Conversely, you must repay the margin call.
However, when your balance is insufficient to handle the margin call, your position can still be closed. To do this, your security deposit will be used to clear the margin call.
What is the term of the future?
The maturity of a future is simply the date on which the contract must end. Futures generally have 4 major maturities. These include March, June, September and December. The end date corresponds to the 3rd Friday of the month, also called the day of the 4 witches.
Then, when you opt for futures trading, you are free to choose the maturity that suits you. It should also be noted that on each future, many deadlines are open simultaneously. These can be semi-annual, quarterly or even monthly. However, a large number of traders opt for the earlier expiration.
When can you trade futures?
Another benefit of being a futures trader is being able to trade at any time. Indeed, the futures markets trade practically 24 hours a day and 6 days a week. However, the trading hours of the futures vary according to their respective exchanges. Each type of future then has its own opening and closing hours.
How is the investment in futures carried out?
Futures trading can be done through a broker. The latter acts as an intermediary and is responsible for routing the orders on the market. For this purpose, transaction fees are required for trading futures. These fees vary from broker to broker.
What strategies to adopt to trade futures?
To trade futures, you can adopt several strategies: classic speculation and hedging operations. All basic trading strategies can be performed with futures, in addition to the benefits associated with this product.
Among other things, these are leverage, transaction fees, margin, liquidity, regulation and regulation of the contract. Thus, futures represent star products for both professional and individual traders.
With regard to hedging transactions with futures, they are categorized into two groups: classic hedging of equity portfolios and complex hedging between derivatives.
In the case of traditional hedging, an investor is for example able to short futures contracts up to the size of his portfolio. The cost of this hedging is significantly lower compared to ETF-type hedging products.
Finally, as for complex hedging between derivatives, the range of strategies available to traders is expanded after combining options and futures contracts. The trader has the possibility to intervene simultaneously on directional elements. However, he must add temporality and volatility criteria to his strategy.
Have a good knowledge before embarking on futures trading
Before you start trading futures, you need to consider several factors. First of all, you need to have a good knowledge of the financial markets, but especially of the underlying asset which is the basis of your future.
Then, before any investment, you must ensure that the futures are perfect for achieving your objectives, taking into account their nature. These are indeed short-term speculative products.
What are you risking in trading futures?
The trader benefits from a leverage effect thanks to the initial security deposit which is low. However, it is important to state that leverage is just like a double edged sword.
It can amplify your gains, but also your losses, which can quickly lead to great financial loss in the event of poor anticipation. It is therefore very important to do a real follow-up of the underlying asset to unwind in time a position that did not suit you at all.