A futures contract lasts for a certain amount of time. Also, cash is not the thing that is really at stake here. Instead, traders use futures contracts to protect themselves from price changes or to make some money off of changes in the prices of commodities. In other words, if you buy a futures contract, you and the seller will agree that you will buy the underlying good at a certain date and price. Whether you make money or lose money on your futures contract will depend on how much the price of the underlying goods changes from the fixed price to the actual price. Before the futures contract ends, the seller and the buyer usually settle their short and long positions on their own, and they almost never take delivery of the goods in play.
Changes in the prices of futures contracts
Price changes in a futures contract are caused by many different things, most of which are hard to predict. The most powerful moves are made with interest rates. If you are trading in a currency futures contract, the policies and trading activities of the Federal Reserve, the U.S. Treasury, and foreign central banks will affect interest rates and then currency prices. When you bet on stock indexes, your futures contract will be affected by anything that affects the stock market as a whole. Again, interest rates are a very important thing to think about. If these go up, it will hurt the stock market and make it harder for you to make the gains you were hoping for. Of course, interest isn't the only thing that matters. General economic factors, seasonal factors, and the expected price of a good in the future should all be taken into account.
Futures contracts have a price that changes a lot more than the average stock on the stock market. A commodity's price could be going up one year and going down the next. No one who trades in futures contracts can afford to take it easy. In an ideal world, the commodity trader will need to use both fundamental analysis and charts to figure out what might happen in the future.
Fundamental analysis is a bit of a grind because you have to keep an eye on supply and demand. If there is more supply than demand, the price of the commodity will drop, and if there isn't enough supply to meet demand, a trader in futures contracts could make a lot of money because the price of the commodity went up.
Changes in commodity prices are usually caused by things like fundamentals, natural disasters, bad seasons, politics, and how people see things. Using charts, you can find the formations or patterns that show when a market will go up or down. Futures contract traders can use bar charts because they are easy to understand and useful. It has information about how prices, volume, and open-interest change on each futures market. These commodity charts are put together every day, every week, and every month. The patterns from the past will help you get a long-term view of the market. But when you plan your trades, you should also look at things like moving averages and oscillators.
Who is in the game of futures contracts?
As we've already talked about in this article, there are two reasons to buy futures contracts: one is to protect against changes in commodity prices, and the other is to make money from those changes. Most of the time, people who hedge are also people who need the underlying commodity in some way. If the commodity is wheat, for example, it could be a miller who is hedging against higher wheat prices in the future. On the other hand, a speculator doesn't care about the underlying commodity and will only buy a futures contract to make a quick buck.
Futures contract hedges come in two main forms: a long hedge and a short hedge.
Short hedge: A trader who owns the underlying commodity or who will lose money in some way if the price goes down sells futures.
Long hedge: Someone who uses or processes the commodity buys futures because they are worried that the price will go up. The trader could sell the futures contract at a later time, possibly for more than he would have to pay the producer at that time, and keep the extra money.
Even though they don't have a natural long or short position, speculators also have a role to play here. Their only goal is to buy cheap and sell for a profit. In the process, they create the liquidity that is needed because they often trade in the opposite direction of the hedger.
Pros of trading futures contracts
Trading in futures contracts has a number of benefits, including:
Due to volatility, if you have good trading sense, you might be able to make more money faster by trading futures contracts than by trading stocks. If you don't, you might lose more money faster.
Futures are investments with a lot of borrowed money. As margin, you only need to come up with a small amount, between 10% and 15% of the value of the underlying futures contract. This lets you keep the full value of the contract as it goes up and down. A performance bond is the money that was put up. The difference between the margin and the full contract value does not earn interest, which is another benefit.
Futures contracts are one of the most fair and efficient markets because of how they are traded. After all, it is done in public with a shout.
Futures contract trades have relatively low commissions, and they are only charged when a position is closed.
Most of the commodity markets are big and full of people. Futures contract transactions happen quickly, so there is less chance that the market will change in a bad way between the decision to trade and the trade itself.