Why Investing In Futures Can Be An Attractive Option
Futures trading can be an attractive investment option for some people. It is a type of investment where investors try to take advantage of trading futures contracts. These are contracts that are made by producers of a certain commodity with a dealer which involves the obligation of delivering a certain amount of a certain commodity for a specified period of time in the future. The commodities that such futures contracts trade can include grains such as wheat, corn to other produce such as lumber, livestock, cattle, coffee and even orange juice. There are also futures contracts for precious metals such as gold, silver and platinum.
What makes futures trading quite attractive is the high level of investment leverage that it offers. Investors can invest just as little as ten percent of a futures contract’s value in order to have the opportunity to trade it. This allows investors to trade futures contracts using lesser investment capital for trading larger valued contracts.
Futures contracts usually have standardized amounts of the commodity that they involve. For example, if an investor holds a future contract for wheat, he usually holds a value worth 5,000 bushels. Trading the contract would be dealing based on the value of the 5,000 bushels of wheat.
Although futures contracts only require a fairly small investment (usually ten percent of the contract value, known as the margin), investors should still think before taking or buying a futures contract. Beginner traders should first try to establish that they can afford to trade such a contract. Traders should consider if they have enough margins to cover the contract as well as if they have what it takes to trade and deal a sizable move in prices that can go against their position.
It is also important that beginner traders try to establish a system of risk and reward when trading for a particular commodity. There are many factors that may affect the position of the trader in different futures contracts since they can involve a variety of commodities. Traders should have a good idea on how to handle their position in order to make money in futures trading. A good way to do this is to establish a stop loss feature on traded futures. This simply means that the investors establish a certain price range wherein the contracts may stop trading in order to preserve profits from the trade or to minimize the possible losses.
Beginner traders should also consider spreading their trading from a variety of commodities instead of only dealing on one. If one has the capital to afford in trading five futures contracts, it would be wise to have the contracts involve a variety of commodities. This way the risk may be spread over a varied number of commodities, thereby providing a more or less stable position when one of the commodities suffers a decrease in price value. Dealing with only a single commodity in this case can considerably increase the possible losses.
Beginner traders should only try to risk about five percent of their tr5ading capital on futures contracts. The reason for this is because, one can also easily lose considerable capital in futures trading. It is wise for traders to only invest the amount that they are prepared to lose.
The Basics On Emini Futures Trading
Fundamental analysis is a methodology for analysis of a company as a viable stock that you want to hold for long term. Fundamental analysis is more widespread in the world of investing since you are going to hold your companies for 10 to 20 years, you do not wish that your companies go bankrupt the next day. Some of the common ratios used are P/E ratios (price earnings ratios) which measures the relative price of the stock to the earnings of the company, the EPS (earnings per share), the debt equity ratio and tons of other ratios.
Although I have spent considerable time studying such ratios I discovered that you do not really need such information to be successful in day trading. I repeat, fundamental analysis plays a marginal role in day trading. In fact, most of the time, I don’t follow it at all. If you still have reservations about ignoring fundamental analysis, I recommend trading ETFs (exchange traded funds) such as QQQQ which mirrors the movement of the NASDAQ 100. In essence, you are actually trading the index like a normal stock. Indexes usually have a huge number of stocks in them, making them less susceptible to company specific news. However if you are paranoid, then you might still want to follow the news of the major companies in the index.
There is no lack of information and no end to analysis. Knowing the fundamentals might seem cool when you discuss company so and so over a cocktail party, but it will not help you rip money off Wall Street in day trading. Being able to remove fundamental analysis from the decision making process is also one of the reasons why I recommend trading Emini index futures.
Paper Trading: Don’t Ever Underestimate it!
Paper trading refers to trading with virtual money, you do not use real money. You jot down in your notebook when you bought at what price and why. When you sell, you record in your notebook again why you sold and calculate the profit or loss associated with the trade.
If you cannot make money by paper trading, you can forget about making money in real futures trading. Always test a new trading idea with paper trading first before using real money. Also start with paper trading after a long period of break, to help you get back in touch with trading.
Although there is very little difference between paper trading and real trading in Emini, real trading is subjected to slippage and psychological factors come into play when you are using real money. Do not underestimate the impact of psychological factors on your trading. After you have a reasonable method and money management techniques, it is the psychological factors which will determine whether you make a profit or loss.
Some traders have created software to paper trade. You hit the buttons like you are doing real trading but only virtual money is involved and no real cash is used. The system will record down the time, price, symbol and the position opened or closed. This saves you the trouble of keeping a paper record.
How To Select A Futures Broker
Commodity futures trading can produce enormous profits for you however it is also a very tricky business and only individuals with money that they can really afford to or risk losing should consider embarking in this type of market.
Commodity trading futures without a doubt is an attractive as well as high profit venture that those only with a high risk tolerance find it pleasing. Purchasing a future entails entering into an agreement to sell or purchase a commodity or product for a definite price or value at a time specified in the future.
When considering commodity trading futures, it is very important that you study and read extensively before you make any investment. After careful study, you must investigate carefully the commodity brokerage houses. Note that commodities are not traded directly on exchanges by individuals rather trading is done through firms and individuals who are rightfully registered with the Commodities Futures Trading Commission.
Cautiously read the disclosure information through that is made available by the brokerages you are looking at. Ask yourself these questions:
Do you want to electronically place orders or through a live broker?
Do you want to grant your futures broker power of attorney then allow him carry out trading decisions?
Which types of markets would you like to trade and what is their scope and can you afford them?
How much dollars can you afford to waste or lose?
What expectations do you have from trading? Is it just for fun or to make profit or earn a living?
Asking and answering these basic questions not only make it easier for you determine whether trading commodity futures is appropriate for you, it permits you to choose a commodity broker based upon your needs as well.
The commodity broker
The markets generally are changing constantly and your commodity broker will stand by you for all the lows and highs of the market. As they constantly on the front-line, they are capable of advising you to your best position at any moment and will give you instant updates on topics and facts related to your investment.
They are in charge of other commodity contracts and these verify checks and calculate everything that they accomplish. You are protected completely because the commodity brokers generally has vested interest. Here are tips for selecting a commodity broker:
1. When contemplating on a broker, first take into account the brokerage; is it reputable? Check with the NFAs website because it acts to the same extent the Better Business Bureau for brokerage trading organizations in the U.S. markets; you can get in touch with so to discover if the brokerage has any record of black marks.
2. Pay keen attention that your commodity broker should be able to assist you to understand the usually complicated futures commodities trading world.
He should be knowledgeable enough to verify and validate the prices or value of the unfinished goods that does not easily come to most.
3. Your commodity broker must show expertise for his trade. A number of brokers specialize or concentrate in only one market but others deal with all types so they have a broader knowledge.
Some brokers can better relate to day-traders while others to position-traders. There are those who prefer doing spreads while others are geniuses at option trades. Ask what your broker main focus or specialize in?
4. Your commodity broker must be involved actively in all markets both in futures and commodity trading so he will be competent to give you an account on all sides of the markets goings-on.
5. Make certain your commodity broker knows what he is talking about and should be able to assist you in whatever type of trade you plan to do.
As a matter of fact, a reliable commodity broker will attempt and make an effort to discover what your objectives and trading are.
6. You should have good connection with your commodity broker. You should feel that he has your best interest.
Without the benefits of a commodity broker, essentially, you are required to dedicate a lot of your effort and time understanding everything involved in trading.
Of course, with a futures broker, at all times you have an authority that you can consult with and can direct you as well as somebody who wants you to succeed sincerely as a commodity investor.
Keep in mind that trading futures commodity can be exciting, lucrative as well as can cause you much losses. For this reason, when considering trading futures commodity, beware.
Understanding The Emini Futures S&P 500 And NASDAQ 100
Future contracts originate from commodity trading. A future contract is an obligation to buy/sell a certain quantity of commodity at a specific date for a specific price determined at the outset of the contract. Futures contracts are frequently used for hedging risks and also for speculation.
For example, with the recent hike in oil prices, an airline company which uses a lot of fuel might want to hedge it’s exposure to oil prices through the purchase of oil futures. If the price of oil is $60 now and is expected to go up to $70 within 3 months, the airline would hedge its exposure by purchasing the 3 month future contracts so long as the agreed price is less than $70.
Oil prices now $60
Expected oil price in 3 mth’s time (by airline) $70
Price of 3 mth oil contract (by oil producer) $68
Actual price 3 mths later $65
Let’s assume the airline can find an oil producer willing to sell oil 3 month later for $68, the company would enter a futures agreement with this oil producer for delivery of a certain quantity of oil in 3 month’s time. If the price of oil falls to $65, the airline still has to purchase at the agreed price of $68. But what propelled the airline to enter the futures contract in the first place is its expectations of future oil prices going up to $70 in 3 months and buying at a price below $70 (3 months later) seemed reasonable to the company.
Index futures are cash settled, there is no physical delivery of commodity as in the case of wheat, corn, etc. Although index futures can also be held for the long term, the time span we are concentrating on is a day. We are using the index futures as a vehicle for speculation and not for hedging as in the case of the airline company.
What is the Emini S&P 500 and NASDAQ 100?
NASDAQ 100 and S&P 500 index futures is listed on the Chicago Mercantile Exchange (CME) and trades on the Globex electronic system. CME acts as the counter party for each trade, hence if you short futures, CME will be taking the long position and vice versa.
NASDAQ 100 Emini contracts is actually one fifth the size of their larger counterparts, the NASDAQ 100 index futures. Each point of the index will represent $20 and the minimum fluctuation ( tick size ) is 0.5 points which is equivalent to $10.
S&P 500 Emini contracts is actually one fifth the size of their larger counterparts, the S&P 500 index futures. Each point of the index will represent $50 and the minimum fluctuation ( tick size ) is 0.25 points which is equivalent to $12.50.
Globex opens from 16:30(EST) on weekdays and 18:00(EST) on Sundays and public holidays. The closing time is 16:15(EST) on all days. However, there will be a scheduled maintenance of Globex from 17:30 till 18:00 (Monday through Thursday, nightly). I know the timings can be quite complicated, however as day traders, we are mostly concerned with trading when the market is opened as we have to capitalize on the higher liquidity available. I do not recommend entering trades after market hours, due to low volume which leads to slippage. The time span you have to concentrate on is really the market opening hours from 9:30 till 16:15 (EST).
More information regarding the contract specification of the Emini can be found on CME’s website.
symbols for the S&P 500 and NASDAQ 100 Emini index futures. Both the NQ and ES emini contracts have expiry months in March, June, September and December which are denoted by the letters “H”, “M”, “U”, “Z” respectively. Hence NQ05Z will represent the NASDAQ 100 emini contract with expiry month in December 2005. Similarly, ES06H will be the symbol for an S&P 500 emini contract with expiry month in March 2006.
March H
June M
September U
December Z
How To Invest In Oil Futures
For any peoples not in the acknowledge, make investing in oil futures could seem complex and high-risk. In several ways, it
could be happened merely on a bit patience and persistence, you are able to really get profit on investment in oil futures and options.you essential empathise that an oil futures option is just the right, ne’er the obligation, to put (sell) or call (buy) 1000 barrels of crude oil at the strike price inside expiration date. You’ll purchase a premium to be eligible to these rights. Believe of investment in oil futures for related to trading the stock exchange just that the matters being traded are crude oils and its distillations. Note, that crude oil options are traded in barrels whilst fuel oil futures and nonleaded gas futures are traded in gallons.
You must have an online futures trading account for start investing on oil futures. Your capability for trading in will however be evaluated by the brokerage firm in conditions of nett income, nett worth, investing experiences and capability to accept and hold up high-risks for loss or profit . Intrinsically, it gives to be reliable about your investing background knowledge for, so, investment in oil futures is a really high-risk effort. Once your application is authorised, you’ll so be asked to deposit the minimal balance involved in starting your account. You are able to begin trading with your selected crude oil, fuel oil and nonleaded gas futures.To make a winning in investment in so much a risky area, you have to do some research and technical analysis. You’ve numerous sources ready in that involve beginning on the every week reports and useful charts publicised from the American Petroleum Institute (API). You likewise have to allow the principal law of supply and demand, the temporary fluctuations, the seasons of the year and then, more significantly, the current geopolitical situation affecting the major oil producer states.Your technical analysis can affect looking the break through spread, the trend in trading volume, the overlap both of short term and long term trends, and candlestick charting, to name a some.All but winning oil futures traders usually watch to the crack spread at the beginning, which is only the relation ‘tween one barrel from crude oil to its by-products and akin products.
Managed Futures Trading For Better Portfolio Management
Your cash portfolio requires constant review and you need to look at hedging opportunities to ensure that they do not get eroded in value. While you can do this by regularly churning your portfolio, there is another method to achieve this objective as well.
Remember that churning your portfolio may not always be appropriate for every investor. Some of you may not have the time to do that and you would not want to pay the high professional charges that portfolio managers typically change. Moreover, you may wish to retain all the stock s in your portfolio and not want to buy anything new for some time. This is when you can make use of managed futures services from experienced professionals and ensure that the value of your portfolio is intact.
Through the managed futures services, you can have greater variety of stocks in your account and you would be able to balance market risks or volatility in a better manner. Essentially, the service is provided by advisors who advise you to take positions on futures making use of different global markets as the medium.
The benefits are as under:
a) Taking futures trading positions on bonds and equities across different markets makes for diversification and helps you develop a very low or even negative correlation to your existing portfolio. You are therefore able to deal with any volatility in your market much better.
b) These advisors can take advantage of market trends elsewhere and trade in a variety of asset classes. They can take positions in the commodities markets if they feel that inflation measures are not bearing fruit and during deflationary times, they can even take short positions in those asset classes.
c) Participation in global markets becomes very easy and you get exposure to stock indices, commodities, precious metals and nonferrous ones, different foreign exchange currencies as well as energy products. You are thus able to increase your chances of profits due to ever changing market dynamics that have an impact on asset classes. The right advice from an experienced advisor can result in quick short term reward.
A word of caution though is in order. As any form of derivative trading is fraught with risk, only if you have deep pockets and can tolerate risk should you indulge in this. It is also imperative to select the right advisors. Those experienced and in the business for a long time have a disciplined approach to trading and would be able to put in place adequate risk mitigation measures to balance the risk-reward equation.
Managed futures trading overall have more advantages than disadvantages if you are able to engage true professionals in this activity.
Technical Analysis In Futures Trading
When it comes to futures trading and especially those who wish to trade intraday, fundamental analysis of a particular stock may not hold much importance. You want to make quick profits due to price volatility and exit your positions. It is only when you wish to hold on to a position for some time that some aspects of fundamental analysis come into play and even that is quite limited.
Technical analysis in futures trading involves mainly three elements – the price of the asset class, the volume traded and the open interest positions that have been created. The analyst looks at these in order to form an opinion on the likely movement of the asset class in the short term.
You would have noticed that four price points are mentioned in the papers relating to an asset class. The price at which a futures contract opened, the high it made during the day, the lowest point as well as the closing price. Of these four, it is the closing price that is considered significant as that sums up the activity for that stock for the day. The opening rates are not seen to be as important mainly due to the buildup of contracts from the previous day and that is seen to influence the opening prices.
Generally, when the price increases with volumes, the indication is that particular contract is in favor and therefore one can have a bullish view on it. The increase in open interest is also another indication that more buyers want to buy the contract and you can therefore get in as quickly as possible to make your profit from the leveraged position you can take.
It is important to mention here that technical analysis does not always mean that you can be certain of the movements of the contracts. It can be used to establish probabilities and you should not confuse it with a particular trend that is sure to happen.
The technical analyst looks at the trendlines that have been established over time for a particular stock to determine the probability of the stock behaving in a specific manner. These trendlines serve as a warning and if specific points in the trendlines are broken, that stock would be able to continue with the momentum in all probability.
For instance, when a stock makes a new high, it means that it is likely to continue the trend with each high it makes being higher than the previous high. The same goes for stocks making a series of lower lows. You can be reasonably sure that this stock will hit new lows in the short term.
Other elements that a technical analyst looks at in futures trading are support levels and resistance points.
What are commodity options?
Commodity options offer the option holders the right to buy and sell commodities at the specified rates within a specific time. The commodity options are offered in several over-the-counter markets and exchanges. Helping people to ensure against the price volatility is the main function of the options.
There are two main varieties of commodity options. These are called call and put options. Over-the-counter markets offer different varieties of them. They can be defined as the contracts that allow the buyers an option, the right not an obligation for buying and selling at specific rate with the specified date. The most important feature of these options is that they do not obligate either of the parties. This can be called as one of the most important difference between a futures contract and an options contract.
Futures contracts are known to obligate both parties to abide by the terms of the contract. The options may be written for the underlying assets including financial indexes and financial instruments. However, if the underlying assets are commodities like precious metals, grain, oil and other agricultural products, the options will be called commodity options.
The main factor that differentiates the options is the criteria whether they offer the ‘buyer of option’, the right to buy or sell the commodity at rates that are specified before their expiration date. The options that offer a right to buy are known as call options whereas the ones that offer a right to sell are known as put options.
An options contract must specify certain things including the commodity being traded, whether the options are call or put, number of units being traded, the expiration date and the strike price fundamentally. In brief, commodity options are a great help to traders as they offer an insurance against the price volatility.
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