futurestradingpedia.comFutures Trading by FuturesTradingpedia.com

Set As Homepage | | Blog Options Trading Home | Summaries | Quiz | Quote Us | About Us | Contact | China Stock Index Futures A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z Javascript Tree Menu Futurestradingpedia.com EXplorer will open here if you enable JavaScript in your browser. What Is Futures Trading? What Is A Futures Contract? What Are Futures Options? Latest Updates: (May 16, 2012) NEW! Futures Strategy! (Mar 14, 2012) NEW! Forex Futures! (Jan 28, 2012) NEW! Risks of Futures Trading! (Dec 21, 2011) NEW! Financial Futures! (Nov 15, 2011) NEW! Commodity Futures! (Oct 26, 2011) NEW! Kinds of Futures Contracts! (Sep 30, 2011) NEW! Futures Minimum Tick! (Aug 24, 2011) NEW! Futures Contract Size! (Aug 8, 2011) NEW! Futures Basis! (Aug 7, 2011) IMPROVED! Single Stock Futures Tutorial! (Aug 1, 2011) NEW! Basis Risk! (Jul 27, 2011) NEW! Futures Trading Quiz! (Jul 6, 2011) NEW! SPAN Margin! (Jun 23, 2011) NEW! Nikkei225 Futures! (Jun 13, 2011) NEW! Futures Chain! (May 17, 2011) NEW! Futures Term Structure! (Apr 12, 2011) NEW! Futures Butterfly Spreads! (Jan 27, 2011) NEW! Futures Calendar Spreads! (Oct 29, 2010) NEW! Contango! (Oct 13, 2010) NEW! Inverted Market! (Sep 25, 2010) NEW! Normal Market! (Sep 08, 2010) NEW! Bear Spread! (Aug 26, 2010) NEW! Bull Spread! (Aug 04, 2010) NEW! Futures Arbitrage! (July 16, 2010) NEW! Reverse Order! (July 12, 2010) NEW! Roll Yield! (July 7, 2010) NEW! Roll Forward! (July 1, 2010) NEW! Offsetting Futures! (June 23, 2010) NEW! Steps In Trading Futures! (June 14, 2010) NEW! Futures Spreads! (June 2, 2010) NEW! History of Futures Trading! (May 24, 2010) NEW! Futures Settlement Tutorial! (May 17, 2010) NEW! Full Contract Value Tutorial! (May 7, 2010) NEW! Index Futures Tutorial! (Apr 23, 2010) NEW! Futures Orders Tutorial! (Apr 15, 2010) NEW! Long and Short Tutorial! (Apr 13, 2010) NEW! What Is Daily Settlement! (Apr 9, 2010) NEW! Futures Open Interest Tutorial! (Mar 28, 2010) NEW! Futures Expiration Tutorial! (Mar 25, 2010) NEW! Margin Account Tutorial! (Mar 14, 2010) NEW! Margin Call Tutorial! (Mar 12, 2010) NEW! What Is Single Stock Futures! (Mar 12, 2010) IMPROVED! Maintenance Margin Tutorial Improved With More Calculations! (Mar 9, 2010) NEW! Maintenance Margin Tutorial! (Mar 8, 2010) IMPROVED! Variation Margin Tutorial Improved With Pictures! (Mar 5, 2010) NEW! Variation Margin Tutorial! (Mar 4, 2010) IMPROVED! Futures Daily Settlement Tutorial! (Feb 26, 2010) NEW! Initial Margin Tutorial! (Feb 24, 2010) NEW! What IS by Futurestradingpedia.com (Feb 20, 2010) NEW! Cash Delivery Tutorial. (Feb 15, 2010) NEW! Physical Delivery Tutorial. (Feb 06, 2010) NEW! Final Settlement Tutorial. (Jan 18, 2010) NEW! Daily Settlement Tutorial. (Dec 24, 2009) NEW! Mark To Market Tutorial. (Dec 9, 2009) NEW! Futures Contracts Tutorial. (Dec 2, 2009) NEW! Futures Margin Explained. (Nov 13, 2009) NEW! Single Stock Futures. (Oct 1, 2009) Launched! Futurestradingpedia.com is officially open! Futures Trading Education Starts Here... Futures Trading Select Your Language... Translate to Chinese Translate to Spanish Translate to French Translate to German Translate to Italian Translate to Portuguese Futures Trading - Introduction Futures trading is the trading of futures contracts which allows specific stocks, commoditites or such assets to be traded at a pre-determined price in future. For instance, a farmer may short a futures contract on his 5000 bushels of corn grains at the price of $0.30 per bushel to a buyer of corn grains. By doing so, the farmer has guaranteed himself the price of $0.30 per bushel for his corns when harvest time comes. The buyer would also have guaranteed himself the purchase price of $0.30 per bushel. In this case, the farmer is clearly hedging against a drop in price of corns while the buyer is clearly expecting the price of corn to be higher than $0.30 when harvest time comes and commits himself to buying at that price. Of course, this is merely an over simplified example of how futures work. There are many people who also lump Futures trading and options trading into one term known as Futures Options or Options Futures or Futures Option Trading and take it to mean the same thing. It must be clarified here that Futures, Options and Futures Options are three distinctly different forms of financial instruments and cannot be referred to as one single study. Learn the Differences Between Futures and Options . Why Futures Trading? The above example outlined a classic use of futures in commodities trading, also known as commodities futures trading. Indeed, Futures are derivatives instruments that derive their value from their underlying assets and their main function is to help buyers and sellers of the underlying asset go into purchase agreements that protect against price fluctuations. To date, this remains the most important function of futures trading. However, apart from being a great hedging tool like it is meant to be, futures trading also opened the door to leveraged speculation of price fluctuations and have created many a lucky stock market millionaire. In fact, with the creation of Single Stock Futures (SSF) in 2002 in the US market by the CBOE , futures trading now extends to stocks of listed companies as the underlying asset, providing participants in the capital market with another avenue of leveraged trading. Yes, leverage is another reason that makes futures trading so powerful and dangerous. Futures trading has leverage due to the fact that only a small deposit, known as the initial margin , is needed to control a large amount of underlying asset. Using our corn farmer example above, the buyer of the futures contract on his corns only need pay the farmer a small deposit of maybe only $150 to guarantee the purchase of 5000 bushels of corn at $0.30 per bushel worth $1500 (the "Futures Price") in all. So, instead of paying $1500 to control the price on 5000 bushels of corn at $0.30, the futures buyer paid only $150 to do the same thing. Thats a 10 times leverage on his money. If the price of corn in this example should suddenly surge to $1 per bushel due to a poor harvest, the buyer of the futures contract would still be able to buy the corn from the farmer for only $0.30 per bushel, and sell those corn in the market for $1.00 per bushel, making a total of $3500 out of a $150 capital commitment. Yes, a 2300% profit! That's the leverage power of futures trading. 4 Main Types of Futures Traders There are 4 main types of futures traders in the futures market, creating the liquid futures trading environment that we see today. No matter what you choose to do in futures trading, you will inevitably fall in one or more of these types. The 4 types of futures traders are really classified based on the purpose of their trades rather than the actual trading strategies itself as the same futures strategy can be applied for various purposes. The 4 types of futures traders in the futures trading market are; Hedgers, Speculators, Arbitrageurs and Spreaders. Hedgers Hedgers do with futures contracts what futures contracts were initially designed to do when it was first developed along the rivers of Chicago (read the History of Futures Trading ), which is to hedge against price risk. You are a hedger when you are go short on futures contracts while owning the underlying asset or other futures contracts of the same or related underlying in order to protect your existing positions against price fluctuations. Speculators Speculators form the backbone of the futures trading market we see today. They provide liquidity and activity in the futures trading market through their day trading or swing trading strategies, buying and selling futures contracts outright in order to speculate on a strong directional move. This is also the most dangerous way of trading futures as the price of the underlying asset could just as easily come around and put your position in a loss deep en...