A futures contract is a commitment to buy a commodity with an inherent value at the date specified. It's used by the people who produce those commodities to regularize their income streams and protect themselves from excessive market volatility.
Examples of futures are oil futures, steel futures, agricultural futures like corn, soybeans, sugar and wheat, or pork bellies. Any kind of product that's produced in large quantities with regular production cycles, lead times of more than a month, seasonable variations in availability and price, and near constant demand for the raw material can be the subject of a futures contract.
Futures can be thought of as agreements to sell or buy commodities at a specified price in the future, regardless of the market conditions. If you need the commodity in question, you may buy futures to hedge against a future rise in price. If you sell the commodity in question, you're buying futures to hedge against a decrease in price.
Buying and selling futures contracts allow people to buy and sell the commitments to buy products in respond to market pressures. Unlike stock portfolio or bond investing, you aren't buying a chunk of a corporation or a debt commitment to be paid back with interest, you're taking a gamble on the future price of a commodity.
Futures trading is risky, as is any kind of investment, but some of the risk can be ameliorated by taking on a diversified portfolio.
What Makes For A Good Futures Trader?
The personality type that thrives in futures trading is that of the professional gambler, the person who is certain that their instincts on the way commodities will flow will beat the market trends. (It is possible to take buy-and-hold positions with futures, but that tends to be less lucrative and less volatile. In general, it's also less sound than buy-and-hold strategies for stocks and bonds.).
Backing up that instinct is a lot of technical analysis. Futures traders watch all the news; for example, news about the weather directly impacts growing seasons for commodities such as corn, soybeans and sugar. News about port regulations impacts futures relating to delivery of durable goods and oil from overseas. News about increases in production capability at refineries, or improvements in oil extraction techniques can change the price of oil and often in counterintuitive directions!
There is a lot to learn to become a successful futures trader; you'll want a mentor, and a couple of classes to learn the terminology, the regulations, and how to spot market trends (and how to divorce yourself from your own analysis, so that you don't blind yourself to important trends because you're in love with your own ideas.)
Interestingly, while futures are contracts meant to reduce risk between producers and purchasers of commodities, the trading of futures is a high volatility market.
While there is risk, it can be (somewhat) ameliorated, and there are often trends that are easy to pick out that will help you avoid risk.
The key to being successful as a futures trader is knowing when to NOT gamble, when to take what you've got and call it a day with a reasonable return on your investment.
Author Resource:-
Visit The Online Commodity Trading Directory to find valuable online commodity trading resources. Webmasters can add their online trading website to the directory for free!
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