01 What is Futures Trading

Futures trading are the investments that involved a futures contract, whereby futures contract is derivatives that its value derived from the value of one or more underlying assets in the contractual terms.

To start with futures trading, first of all,  you need to know that futures are not trade at the stock market, however, they are trade in the well-established futures exchange, for example, the Chicago Board of Trade, the New York Mercantile Exchange, the London Metal Exchange, and in Asia, Hong Kong Futures Exchange, Tokyo Commodity Exchange and Jakarta Futures Exchange.

Some of the known futures markets are:

• Agriculture futures – These are futures market involving agricultural products such as wheat, corn, rice and soybean.
• Currency trading – It also known as FOREX (foreign exchange) trading, and involving buying and selling of different currencies from different country such as the US dollars, the Japanese Yen and the Euro.
• Interest rate futures – This market focuses in financial liquidity on the interest rate and bonds.
• Energy futures – It is a market involve in gas and oil.
• Metals – This is one of the most established futures market, better-known products are metals like gold and silver.

Futures contracts are trade at the futures exchange, which clearinghouse is the counterparty to ensure that all trade are completely settle and clear. The contracts at futures exchange are highly standardize, which there are specify underlying instruments, determined quality and quantity of the goods that need to be deliver, pre-set contract size, contractual of time of delivery and the manner of delivery.

• The corn in your morning cereal which you have for breakfast,
• The rubber  that makes your breakfast-table and chairs
• The gold on your watch and jewellery,
• The cotton that makes your clothes,
• The steel which makes your motor car and the crude oil which runs it and takes you to work,
• The wheat that makes the bread in your lunchtime sandwiches
• The beef and potatoes you eat for lunch
• The currency you use to buy all these things like US dollars, Great Britain Pound and Japanese Yen
• The petrol you use to mobilize your vehicles
• The stock indices like Dow Jones, FTSE and S&P.

All these commodities (and dozens more) are trade between the investors all over the world from day to day basis. They are all trying to make a profit by buying a commodity at a low price and selling at a higher price.

Derivatives are the financial instrument whose characteristics and value depend upon the characteristics and value of an underlying asset, typically a commodity, bond, equity or currency. Examples of derivatives include futures, options, forward and swap.

Over the counter (OTC) trading, is an off-exchange trading that done bilateral, offer large array of products, able to execute larger amount and offer the flexible collateral for the reducing the tie up of liquidity.

Futures market is the only way for you to access the derivatives markets. Increased capacity in global markets has accelerated people attention and attracted the interest of traders from around the world. The perspective on the direction of commodity prices, energy prices, metal prices, currencies, interest rates and stock indexes have drawn people eye-sight in investing their fund in the markets.

These are some key terms and concepts that you need to know to trade:

• Contract Size
  – By definition, each futures contract has a standardized size that does not change. For example, one contract of gold futures represents 100 troy ounces.
• Contract Value
  – Contract value, a contract’s notional value is calculate by multiplying the size of the contract by the current price.
• Margin trading
  – A facility provided to you in order to conduct a transaction whose contract or trading value exceeds the paid-in capital. The margin serves as collateral that you pay to a futures brokerage as a security deposit, which serves to guarantee that you are able to fulfill the payment obligation.

There are two basic categories of futures participants: hedgers and speculators.

Hedgers use futures for protection against adverse future price movements in the underlying commodity to manage their risk. The rationale of hedging is base upon the price of the commodity and the futures values to move in tandem. Hedgers are very often businesses, or individuals, who deal in the underlying commodity.

Speculators are the second major group of futures players. Speculators may be full-time professional traders or individuals / investors who trade.