1. The History of Futures Orders: Who Invented Futures Trading
2. Futures’ Features and Main Rules of Deals
2.1. Futures Definition and a Short Insight: Main Terms of the Market
2.2. Cash-Settlement and Physical Delivery Futures – Contracts with Different Features of Fulfillment
2.3. Modern Exchanges or How to Sell Weather Futures – Examples
3. Figuring out Futures Ticker: Marking Formation from A to Z
4. How to Make Money with Futures
4.1. Futures as Insurance from Price Rise or Fall: A Tool for Sharks of Macroeconomics
4.2. Speculative Operations with Futures: Money from Nothing and Skills to Cope with a Situation
4.3. Arbitral Operations with Futures: Multiway Interexchange Deals
5. Futures and Options – What to Choose?
Time has its own rules: technical progress leads to appearance of new affairs, professions, terms. Futures are the tool which was commonly unknown several years ago. But a sharp run in this direction was provided by the worldwide spread of the Internet. It caused interests, activities, professions and even sources of income which couldn’t be imagined a few years ago. It made specialties that couldn’t be dreamed of possible. Take at least, exchange trading: it’s approachable to operate with securities or resources gaining money from million orders either for an older person, or for a hillbilly bone from the rural remote, where it’s not quite good with culture and education.
Surely, successfulness in both cases is provided by self-education: you are not supposed to be taught to trade at the real exchange either at school or at the university. And with those who decided to master this tough but profitable stuff, we’ll figure out the following:
In order to give the answer to the question what is futures trading, I will need to bring my reader to the past, when this derivative (more information about this type of tools you can find in the article “TOP-5 Tips to Make Money with Binary Options – Step-By-Step Instruction for Trading”) emerged. Until the middle of 19th century, trading was engaged directly: producers and workers of rural remote periodically came together at large-scale trading (analog of annual mass rural fairs), where they tried to find a customer for their production. Gaining money, for example, for flour, a farmer bought tools and household items, household goods and fabrics, leaving minimum amount for everyday expenses until the next harvest. Producers of corn and vegetables were in the most unprofitable situation then. They couldn’t count on incomes until the next fall, and amounts of profits were often unpredictable. Good weather, rich harvest and high quality of goods in theory had to give reasonable incomes. But really, such great conditions raised productivity at neighbors’ fields: supply at the “fair” began exceeding demands, competitors broke prices in order to sell at least anything (this process is called “dumping” in economics), and as a result, forecasted enormous profits turned into covering debts that had been accumulated for the year. The situation was just slightly getting better even if the weather was on the side of a producer: merchants couldn’t orientate in opportunities momentarily and rarely sold their goods with the adequate labor price. To cut it short, if mechanics of selling futures orders couldn’t be formed itself, it should be invented. In 1848 in Chicago, there was the first officially confirmed order made with the promised harvest. The item of trading was corn.
So what is futures trading simply? Futures stay for the future. Futures is the promise of a deal. It’s a spring purchase of fall harvest, which is confirmed with documents:
And who will be with greater incomes? Fall will show – when the deal must be fulfilled. Yes, it may seem that market price for the item of trading will significantly fall. Examining futures, examples of such consequences can be looked for in the recent past: oil and its derivatives, as the natural gas, were being traded in 2014 at the price by far lower than of futures made in the beginning of the year. The difference was 30-40%, i.e. making deals in real time, a customer could save millions. But in order to realize the essence of this mechanism, you should imagine the opposite situation. As for an example, we’ll take the same, unstable 2014: coffee raised in price. Those who made a futures for supply of grains before flowering, gained 43% of profits in December. Purchase of futures insures both sides: producer – from an abrupt price fall or no demand; consumer – from lack of supply and price rise. If we speak about the issue what is futures trading simply, then it’s the mutual agreement of selling the concrete resource in the certain period of time with the price arranged before.
Main rules of confirming futures deals were developed in the 19th century. They have gotten few changes since then, and the contract description (“futures specification” in world economics terms) consists of:
In modern economics, when the most part of operations is being made through the exchange, features of the most demanded futures are set by these financial institutes, while ordinary participants of deals operate with ready stakes. Enhancement of exchanges’ role spawned another form of working with futures: standard stakes began being resold by both sides. A producer, who is not ready to fulfill terms of the contract, can yield a part of obligations in an analogical company’s behalf, and so does a consumer, who changed mind and decided the deal wasn’t profitable for them. The exchange anyway controls fulfillment of futures terms. In the arranged deadline, both sides will meet contract conditions: if we speak about modern e-trading, then after 24 hours since the order is closed, the system will calculate profits and losses for participants.
For a reader who thinks seriously about working and making money at the futures market, it’s not likely to be enough just to give a little review of the problem what is futures trading simply. The reader will swiftly move to more serious literature. It order to easily understand what gurus of exchange trading talk about at seminars, you should know several main terms: what are futures and options, what is futures expiration and so on. I won’t overload you with difficulties and I will explain terms simply:
Realization of the issue “what is futures trading simply and how to make money with them” is impossible without recognizing the difference between two main types of contracts.
Physical Delivery Futures are contracts of purchase and sale with suspended execution and fixed price. Sides of the deal, which must be at least two, arrange the delivery from the one and for purchase from the other. In the agreed time, assets are transferred with the price fixed in the contract. The purchase is guaranteed by the mortgage or frozen amount at accounts of traders.
Cash-Settlement Futures (examples will be discussed further) doesn’t stand for the exchange of commodities between sides of the deal. This is just a financial insurance (hedging) risks. Trading at the exchange goes, commodities are being purchased and sold, and participants of cash-settlement futures trading provide contracts fulfillment by their money. That who bought a futures with the price lower than market by the time of expiration, will get their profit. And that who didn’t guess jumps of price and got cash-settlement futures (definition above) with the price higher than market by the time of expiration, covers the difference with their deposit.
We have already figured out what futures expiration is. As this form of deals is more widespread in the century of Internet, I will give you one more answer to the question “what is futures trading simply”, using the futures example related to coffee grains, because a cup of this drink is now on my table:
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As the goal of out talk is to figure out the answer to the problem “what is futures trading simply”, I gave the matching example, which stands in front of me. If we examine this problem broader, modern futures exchanges trade with everything that can be somehow realized. Originally, trading was hold only for the most demanded commodities, imported and exported worldwide, and the process of obtaining futures reminded the game where the winner is that who yells louder. Trading in the 21th century seriously differ, but for that, a range of adjustments were to be implemented into the system:
The online trading platform Globex was tested at the Chicago Commodity Exchange. And platforms that were created similarly to that one today let traders see the futures market and trading for materials on their monitors, participate in the process online, without yelling at the trading hall.
I don’t want to bother my reader with plenty of useless encyclopedic statistics. So, here is the summary:
I must mention “exotics”: in 1997, at that Chicago Exchange, and then at several others, there emerged an opportunity to trade weather. Weather futures appeared as this factor always leads to changes of almost all the quotes: exchange traders, who are players to some extent, couldn’t miss the chance to forecast this aspect. For 0, average weather conditions were take, which are implemented into calculators of electrical energy consumption. Positive and negative forecasts for the ratio to the real situation are the same item of trading, as the cattle or fuel oil, and weather futures are continually demanded.
Online deals are made within a split second, and traders from the whole world take part in trading. This speed of working is provided by the general system of futures marking. It’s quite simple, though, it looks difficult for a non-experienced person. Realizing the answer to the question “what is futures trading simply” and recognizing features of futures description, you will easily figure out all the nuances of this process.
Marking consists of 3 main indicators:
You will just need to remember month-marking: from January to December, it will be like F, G, H, J, K, L, M, N, Q, U, V, X, Z.
In practice, it will be simpler to get on with marking. Let’s take a mysterious item of trading “GzZ7”:
So this is the futures for Gazprom’s stocks, expiring in December 2017.
Having learned marks of popular or more preferable assets, you will be able to orientate swiftly in demand and supply, selecting needed abbreviations mechanically.
It's not likely that readers came to this page because of curiosity and wish to know anything. I am sure the main point is to answer the question “what is futures trading” and to figure out how to make incomes from them. Further, we'll look into ways of making profits with futures and how to choose your personal method.
Let's look into details of exchange operations with futures:
Futures are the universal tool. It provides a trader with plenty of opportunities from direct earning with supply and changes of the base (i.e. difference between futures price and real price) to complicated speculative schemes which are the top of exchange trading.
The desire to hedge (insure) risks caused appearance of futures. But if we speak about the present, orders related to compulsory in-time supply make less than 3% of all orders. The rest are calculation speculative operations. Nevertheless, this type of orders exists: suppliers look for guaranteed demand for their production; customers look for profitable offers. Mostly, participants of these operations are the first and the last unit of futures chain: sooner or later, the contract will come to the end customer. Unfortunately, it's quite difficult to enter this segment of business, surely if you don't need several ten tons of wheat or if you don't need to sell several thousand acres of wood area.
For example, Russian companies are participants of futures markets. With that, Gazprom's sold futures let the company stay float in the moment of abrupt fall of price for energy carriers the last year: futures contracts provided by far higher oil price. Also, futures market equalizes prices and makes jumps caused by speculations not so noticeable.
The range of advantages of popular futures made this market attractive for those who gain profits only from reselling, and who never touched money they operate with, goods they always “purchase” or “sell”. Futures for dummies is the convenient tool. Working with them minimizes risks and creates relatively safe conditions of trading. Time of trading with the concrete futures can be a day and can be several months – and price for this period fluctuates significantly due to approachable and forecastable reasons. This gives the opportunity to calculate rises and falls, making money with the difference. Realizing what futures trading is and being able to analyze the impact of an event on prices, you can make forecasts mostly without any mistakes. Advantages are obvious – they let you make choice in behalf of futures market, even if operations at forex or stock trading are on the other hand:
Experienced traders successfully work in this field of activity, increasing deposits from relatively moderate amounts because of their knowledge and analytical mind.
Arbitral operations are featured by complex mechanics: during trading, a trader has several orders opened at the same time, which are made in different time at the one exchange, or at the same time but at different exchanges. The goal of all maneuvers is to gain profits from the same tool for the difference between futures’ and stock price (intercommodity arbitrage), futures with different expiration time (calendar arbitrage) and so on.
A “prong” can emerge is participants of trading at two different exchanges conflict at opinions about the rate, and price of the same commodity starts to differ significantly. This situation can’t hold for long, and the rate will be leveled soon – this what a trader must orientate on.
To explain it simpler, let’s take at least one situation (I remind that there can be plenty of them and arbitral operations require serious theoretical preparations and practical experience of trading, let alone the initial deposit). But, coming back to the example of spatial arbitrage:
Profitability of arbitral operations is provided by the continuous market control, technical analysis, great number of orders for a short time and full diving into the situation. For acquaintance with financial market and beginning, arbitral operations is not the best choice. Comparing multiway algorithms with, for example, binary options, which give profits just for correctly forecasted course, the result won’t be in behalf of the former.
Futures minimize risks, but binary options show good profitability. Having figured out in details, what futures and options are, you will realize the essence of the choice: slow and safe income or some risk and profits in exponential growth. Risk, by the way, is compensated by knowledge and clear mind.
A novice in exchange trading, who is just looking into opportunities of making money for themselves, can be frightened by futures and lots of information related to this market. Even realizing the answer to the problem what is futures trading simply, it’s difficult to get ready for the first deals. Nevertheless, I must remind you that futures for dummies is one of the most secure tools.
On the Internet, there is much information about techniques of working with them and cleanness of statistics of prices for some commodity: coffee, oil, gas, share of companies. The genuine desire to become a real expert will let you master all that stuff and call yourself successful. In your character and mind or humble initial capital require more active actions, I advise you to examine the opportunity of working with binary options: technique letting make up to 80% profits with each deal of several minutes long.
The base of success in this case lies in proper following trading strategies and money-management. You should select a reliable broker, by the way, which will let you not only make but also withdraw everything you earn. Probably, binary options will become a chance to gain your starting amount for operations with futures, and probably, the business of life.
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