More About Futures Trading
Futures Trading is the Oldest Form of Trading
The concept of futures trading is as timeless as the marketplace itself.
As long as people have been selling such tangible assets as oil, wheat or gold, there have been hedgers who want to protect against the possibility of a future price change and speculators who hope to profit if the hedgers are wrong.
A producer of wheat, oil or another commodity, rather than simply bringing his product to market and taking his chances with willing buyers on delivery day, can hedge by agreeing today to sell his product at a specified price on that future date.
Futures speculators buy up the risk that is offloaded by the hedgers; they make a profit if the price moves in a direction different than the hedger anticipates, and in addition they now own a fungible commodity they can sell at any time until the delivery date to take advantage of market change over time.
The symbiotic relationship of buyer and seller ensures the liquidity of the marketplace and that capital flows smoothly while providing a “discoverable” price for any commodity at any given point in time.
How Futures Trading Has Evolved Through the Centuries:
In its original, ancient form futures trading involved a literal exchange of the underlying asset.
The buyer did intend to take possession of the contracted cattle, wheat, oil or other commodity on the contract date.
But this evolved into the trading of contracts as an asset class of its own for investors who had no interest in the actual product other than its potential for speculative profits.
Contracts were exchanged using the “open outcry” method in public trading pits.
Today, most futures trading is electronic.
A wide variety of indexes — representing everything from basic commodities to the S&P 500 — can be traded online 24 hours a day and 5 days a week, using strategies that take full advantage of the skills taught at Online Trading Academy.
Achieving Dramatic Results in Futures Trading Through High Amounts of Leverage:
The majority of futures traders maintain a margin account with their brokers, which allows them to magnify their results through leverage.
Unlike stock trading in which the margin account is an actual loan, in futures trading the margin is the equivalent of a "handshake" or good faith agreement.
In order to open a futures position the trader has to have on deposit with his broker an initial margin amount that is set by the exchanges.
This amount is typically 5-13% of the futures contract face value.
Think of this initial margin as a down payment when you purchase a house. You put down 20% to control the full market value of your home.
While holding these futures positions you must keep your account balance at a level that meets the maintenance margin amount.
These maintenance margin amounts are usually about 25% of the initial margin.
If your position goes against you causing your account balance to fall below these levels, you will receive a margin call to replenish the account value back to the initial margin or else the brokerage will liquidate your position at the market if you do not comply.
The futures trader now has the equivalent of approximately 10:1 leverage or higher, for each transaction.
The smaller the margin is in relation to the underlying market value of the contract, the greater the leverage.
Let’s look at a historical example of this leverage at work. On August 18, 2009 the S&P E-mini was trading at 980.00.
To compute the market value you would have taken the dollar value per point ($50 per E-mini point) and multiplied it by the last price.
980.00 X $50 = $49,000. The initial margin set by the Chicago Mercantile Exchange (as of 8/18/2009) was $5,625. That is about 9:1 leverage.
For $5,625 you could control a Futures contract worth $49,000!
Getting Started With Futures Trading at Online Trading Academy:
Our courses are designed to give traders a thorough understanding of the underlying assets along with the fundamental and technical tools available to improve the probability of predicting price movement.
Students then learn to apply this knowledge through electronic trading using a state-of-the-art platform which includes a demonstration of live trading in the classroom!
If you like the idea of leveraged trading which allows you to speculate on the value of an asset not only today, but at a given date in the future, then futures trading may be for you!