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Basics of Futures Trading

futures trading
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Futures trading is the buying and selling a specific asset at a future date, at a price agreed upon today. This future trade can be concerning a commodity such as oil or gold, an index such as the FTSE 100 index (more info) of leading British companies, or another instrument such as foreign currency or stock.

Identify Market Underlying

It is the most crucial step. You must identify which market you will trade, be it currency or oil or a commodity such as gold or silver, says Investopedia. Different futures instruments have different contract dates and different contract amount requirements. Do your due diligence before depositing with your broker to ensure that you’re able to trade in the instrument of your choice.

Open an Account

To begin trading futures, you’ll need to open an account with a futures broker. For example, you’ll need currency futures to account from a broker who offers currency futures trading accounts to trade currency pairs on Forex. For stock index futures, you’ll need a stock index future’s trading account from a broker offering those instruments. Again, it’s essential to do your due diligence and ensure that a governing authority regulates the broker.

Fund Your Account

Once you open your account with a futures broker, you need to fund it. You can wire money or transfer funds from another bank for this purpose. Remember, though; every futures market has different contract amounts and contract dates. If you’re trading currency pairs on Forex, you’ll need at least £1500 in your account to trade mini contracts and at least £18700 if you want standard contracts. 

Also, remember that each time you enter into a new position, there will be an extra commission charge so if you’re trading standard contracts, expect to pay at least £30-£40 for this. If you want access to mini accounts, expect to pay an extra 25% commission over standard contract rates.

Understand Margin Requirements

When trading futures, there’s a margin requirement. The broker requires every trader who has opened a futures account to deposit money into their account before they can begin trading. 

The amount of this deposit is determined by the exchange and varies according to each trade made. For example, if you buy one lot (also known as one contract) on oil, it will cost approximately £380-750 depending on the type of oil you’re buying and where your broker is located around the world. You will receive one lot of oil for every £75 you deposit into your account. If you want to trade ten lots of oil at once, you will first need to deposit at least £3740-7470 (depending on where your broker is located) into your futures account.

Choose an Entry Price

The next step after opening your position is choosing an entry price. It will be the starting point at which you calculate all other prices associated with that position. Let’s say that just before the expiry of the agreed contract date, you expect the market to rise slightly above current levels, then this would be a good time to enter into a long position (buy). 

The price you choose here will be the difference between the high price of the market and the price you have just bought your position at. This number can be positive or negative, therefore either add it to the current market level or subtract from it before entering into an extended position. Once you’ve entered into a long position, this is how much profit/loss you’ll make if the market moves in your favour by the expiry date.

Close Your Position

Finally, when your futures contract expires, you’ll need to close your position, says Home.saxo. You do this by selling back into the market any contracts in profit or buying back any contracts in the loss. Remember, though, there is a commission charge every time you enter into a new position, so if your trade goes against you, this can quickly eat away at your account balance. 

To avoid this happening, ensure that all closing prices of open positions are kept higher than opening prices. If you’re trading with an online broker, this is usually not a difficult task.

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