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How to trade futures contracts

When it comes to trading financial instruments, traders have a wide range to choose from. Some of
the most common include stocks, bonds, mutual funds, and currencies, that most people will have
heard about in their daily lives. That being said, there are a few more exotic instruments that traders
can take advantage of, provided they know how to use them. Some of these include derivatives,
including options, futures, and forward contracts.
In fact, investing and trading futures can be a lucrative opportunity for traders provided they know
how futures work. For those interested in trading or investing in futures contracts, we have provided
a few basic steps and explained them for your perusal. Be sure to keep reading to learn more about
this topic.
Understand how futures work
Before even beginning to trade futures, you first must understand how futures work. Futures are
specific financial contracts in which either the buyer agrees to buy the underlying asset at a specified
date, price and quantity sometime in the future (hence the name), while the seller agrees t sell or
deliver the underlying asset at a specified date, price and quantity. These contracts were initially
created in order to help businesses navigate unexpected costs, especially if a business had to deal in
raw materials (such as crops, livestock and energy, to name a few).
For instance, in some industries, such as the airline industry, earnings are heavily dependent on the
price of fuel. To protect themselves from a sudden increase in prices, an airline company may use a
futures contract to lock in current prices if they believe prices will rise in the future. Futures
contracts can be settled either in cash or with physical goods. For most traders, they will settle it in
cash, while some businesses may instead opt for physical delivery of the underlying asset.
Futures contracts are also traded at different hours when compared to the stock market. Instead of
trading from 9:30 am to 4 pm ET, the futures market is open nearly 24 hours a day, six days a week.
Futures can also help investors diversify their portfolios. For instance, if an investor only invested in
individual stocks from a particular energy company, then the company and stock’s performance will
at times depend on the price of oil and energy. Meaning, if the prices of oil and energy fluctuate,
investors could wind up incurring losses. On the other hand, an investor that uses a futures contract
that is based directly on the price of oil, will not have the added risk factors that a company may
Choose the types of futures to trade with
There are plenty of different types of futures contracts to trade with. Because each market can be so
different from one another, futures generally focus on only one or two areas. This means that
traders can have a deeper understanding of the market they are investing in, which may help inform
their trading decisions. Below are a few of the most common categories:
Precious metals: The most common precious metals include gold and silver. Investors who pick
these types of futures to invest in are typically looking to hedge against inflation or other types of

financial uncertainty. That said, precious metals can also be used for other practical applications
such as using platinum for semiconductor chips.
Energy: Futures contracts that are based on energy include things like oil and gas. These contracts
can also serve as a benchmark for oil prices around the world.
Agriculture: As its name suggests, agriculture contracts are often based on things such as corn,
wheat, soybeans, and the like. These contracts are a little bit unique in that they are affected by
weather patterns and seasonality, which can impact prices and risks.
Livestock: Much like agricultural commodities, investors can also trade livestock futures to speculate
on the prices of things such as cattle, pigs, and hogs. Price movements here are typically subject to
consumer tastes, as well as supply and demand pressure, in addition to the standard risks associated
with futures.
Stockindex: As its name suggests, these futures derive their value from a stock index, such as the
S&P 500, NASDAQ, or Dow Jones, to name a few. Investors usually use these futures to take
advantage of anticipated price movements or economic announcements.
Pick an investing strategy
When it comes to actually investing in futures, there are plenty of investing strategies traders can
take advantage of. On the whole, traders will usually become familiar with only one or two contract
types and specialise in a particular strategy that is well suited to their overall financial goals, risk
tolerance, and comfort level. Some common futures strategies include going long or short in a
particular position, as well as using calendar spreads that can be either bullish or bearish. Below is a
more detailed explanation of what they exactly entail:
Goinglong: This means a trader is buying the contract and expecting that the underlying asset’s price
will rise in the future. One big obvious risk regarding this strategy is if the underlying asset drops in
value instead of increasing in the future.
Goingshort: This is the opposite of going long – namely the strategy hinges on traders believing that
the underlying asset will fall in value in the future. This, however, is risky because losses can be
unlimited. This is because the underlying asset can rise in value, meaning there is no true limit to
how high prices can rise in the future.
Calendarspreads: This is a strategy where the trader takes both a long position and a short position
on the same asset but with different delivery dates. Calendar spreads are sometimes known as inter-
delivery, intra-market, or horizontal spreads. In a bull calendar spread, the trader will go long on the
shorter expiration date and go short on the contract that has the longer expiration date. In a bear
calendar spread, this is switched – traders will sell the shorter expiration contract and buy the longer
one instead.
Place the futures trade
Now, it is time to place your futures trade and manage your investments. The best practice for any
trade is to understand its risks and price targets before you enter the market. As trading futures has
its own unique risks, it is vital that traders carefully monitor their contracts. To protect against risks,

traders can use different order types to help manage their trades. An example includes a limit order,
which offers traders a way to control the entry and exit prices. This way, if a trader knows the levels

to enter and exit a trade, this can help them to execute their strategies a lot more efficiently.


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