For many investors, futures markets, with all different trading conditions and strategies, can be both confusing and daunting. There are opportunities to reduce portfolio losses or make significant profits through futures markets, but it’s important to understand how these derivative products work and how to consistently achieve these profits. Can you make money trading futures?
Trading futures is a form of investing that can ensure portfolio diversification and help with risk management. Futures contracts relate to agricultural commodities, rising and falling along with the supply and demand for products such as corn, steel, cotton and oil. You can earn on futures contracts if you follow trends, reduce losses and observe your expenses.
How do futures work?
Futures contracts allow players to secure a certain price and protect themselves against the possibility of sharp price increases (increases or decreases) in the future. To illustrate how futures work, consider aviation fuel:
An airline that wants to block jet fuel prices to avoid unexpected increases can buy a futures contract in which it agrees to buy a certain amount of jet fuel for future delivery at a certain price.
A fuel distributor can sell a futures contract to ensure a stable fuel market and protect against unexpected price drops.
Both sides agree on specific conditions: To buy (or sell) 1 million gallons of fuel, delivering it within 90 days, at a price of USD 3 per gallon.
In this example, both parties are the hosts, real companies that must trade the underlying commodity because this is the basis of their business. They use the futures market to manage their price risk exposure.
Goods are a physical product whose value depends primarily on the strength of supply and demand. This includes grains (corn, wheat etc.), Energy (such as natural gas or oil) and precious metals such as god or silver, to name a few.
A futures commodity contract is a contract to buy or sell a certain amount of certain goods at a certain price on a specific date in the future. Like all futures contracts, commodity futures can be used to hedge or protect an investment position or to bet on directional movements of the underlying assets.
For individuals, commodity futures markets can be accessed primarily through a managed futures account, available through specialized brokerage offices called Commodity Trading Advisors (CTA).
Many investors confuse futures contracts with option contracts. For futures contracts, the holder is required to act. Unless the holder terminates the futures contract before it expires, the holder must buy or sell the underlying instrument at a specified price.
Try it out
It may seem difficult to start working on different futures markets. One way you can learn on the road without compromising your money is to start trading paper. Paper trading is done by imitating transactions yourself (or using a market simulator) until you feel that you are feeling well enough to start trading.
A good way to start is to focus on these four different areas. It will help build your knowledge of how to go without increasing the overall amount of risk. Then, when you feel that you have mastered these areas, try to expand your business to other types of futures contracts.