The Basics of Futures Trading

futures trading

A futures contract is an agreement between two parties to buy (or sell) a specific amount of a commodity or security, at a specific price on a certain date in the future. These agreements typically involve fees and leverage that can increase the risk of substantial loss to both sides.

The original use of futures was to lock in prices for raw materials, such as grain and oil. Nowadays, futures cover a wide range of commodities, securities and intangible assets. URL

Traders may choose to trade just one or two markets or all of them, depending on their personal strategy and knowledge of the market. Some speculators approach the markets through a technical analysis model, while others focus on fundamentals and economic trends.

Leverage is an important aspect of futures trading and can help investors control a larger investment with less capital. It also helps them to hedge against a loss in the underlying asset’s price movement.

The Pros and Cons of Trading Futures

Brokers usually require a margin, or minimum deposit, to get started. This amount is a performance bond, and must be maintained throughout the life of a futures position to keep the value of the contract stable.

Fees, leverage and commissions can all add to losses. This is why it’s important to understand the risks and costs associated with futures trading before investing any real money.

Futures are a complex and volatile financial instrument that can generate significant profits or losses. Before you begin trading futures, determine your risk appetite, set profit objectives and have an exit plan in place. Having these tools in place will help you minimize your overall risk and maximize your returns.

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