How to Trade Futures: A Beginner’s Guide
Futures trading is a great way to trade, but it is also one of the riskiest ways to trade.
Futures trading is the buying and selling of contracts, predicting what the price will be in a given time frame.
When trading futures, it is important to understand the contracts, the types of trades and the risks involved. This way, you can ensure that you are investing safely. To help you understand how to trade futures, here are some things every beginner should know.
What are futures?
Futures contracts are a type of agreement to buy or sell a certain amount of an asset at a specific time in the future.
For example, trading a contract for the sale of gold three months from now, at a price 1.25 times higher than what you bought it for today.
Types of futures contracts.
In Futures there are two types of contracts that you should be aware of, the buy and the sell.
The futures purchase contract obligates the buyer to purchase the underlying asset at a specific date and time, called the delivery date.
While the futures sale contract obliges the seller to provide the asset.
In any transaction it will be necessary for you to consider how you are going to act in relation to these two contracts.
Trading strategies.
There are many ways to protect your investment in futures trading.
The first way is by setting up a loss limit order. When you buy a futures contract, it is in your best interest to set a stop-loss order at the point where you are willing to lose money. Once the commodity price reaches that level, the contract will automatically sell and prevent your losses from becoming larger.
Another way to protect your investment is by participating in a spread trade. A spread trade is done by buying a futures contract and then selling it simultaneously on the same asset, but with different strike prices or expiration dates.
This type of trade allows you to profit if prices go up or down. Basically, this trade helps reduce risk because if prices fall below their original price, both contracts will still have some value and mitigate losses.
The last strategy to protect your investment would be to place an option with a call date farther out than the expiration date of your original futures contract. This will allow you to close the position before it expires if it goes bad and keep some of your money intact even if prices go down more than expected.
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