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Futures Trading Online

Futures Trading Online

Futures trading: what is futures trading?

The futures trading market of today has its origins in the agricultural world of the 18 th century. Also known as derivatives, farmers would trade futures in order to settle on a fixed price for their crops before they were actually harvested. In this way they could ensure that they would definitely be able to make a living off their produce. Today, futures are available not only on soft commodities such as sugar, wheat and cocoa, but also on other commodities including metals and energy, as well as financial products such as equities and bonds.

A future can be defined as a legal agreement to sell or buy a standard quantity of a specified asset on a fixed future date at a price agreed upon today. The parties to a futures contract are the buyer who agrees to buy on a particular future date and the seller who agrees to sell on a particular future date. The trading accounts of these respective parties are debited or credited on a daily basis, depending on market fluctuations.

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The obligations imposed by a futures contract can be offset through the undertaking of an opposite and equal trade in the market. Although not protecting contractors against loss, this process does enable sellers to escape their delivery obligations and buyers to escape their purchasing obligations should the markets end up going against them. In relation to online futures trading, offsetting enables the buyer of a futures commodity to escape from a contract should the circumstances present at the time of contracting alter substantially. The process of offsetting a position is known as closing off, which simply put is the selling of a future.

Futures trading can be used for various purposes. Speculators are renowned for trading in long future positions and short future positions. This type of trading typically involves high profits and high risks. Potential maximum loss in the case of a short future is unlimited, making short futures less common in the marketplace than long futures. By contrast, hedgers use futures to reduce the risk of cash market positions. Short hedges are used to protect producers/sellers should market prices fall, while long hedges are used to protect buyers in the event that market prices rise.

One other tactic commonly used by futures traders is "spreads". Spreading is seen to be one of the less risky ways to trade in futures. This form of futures trading involves gaining profits from the price difference between two futures contracts of the same commodity. Commonly used spreads include intercommodity spreads and intracommodity spreads.

Intracommodity spreads, commonly known as calendar spreads involve the concurrent purchase of one short and one long future of the same commodity. An example of an intracommodity spread would be to sell a gas oil future with a delivery date in March and buy a gas oil future with a delivery date of April . In this way you would be able to benefit from an unexpected price differential between the two delivery months. By comparison intercommodity spreads, otherwise known as inter-market spreads, entail the concurrent purchase of a long future and a short future of different commodities. An example of an intercommodity spread would be to purchase a gas oil future and sell a Brent crude oil future in order to profit from the price differential between the two products. If you are familiar with various different markets, spreads are undoubtedly a more secure way to trade in futures.