Futures trading is one of the most popular forms of investing, and it is growing in popularity as people are looking for new ways to make money. Trading futures can be risky but also very profitable, so it is essential to understand what you are getting into before you begin. This article will discuss what futures are, the different types of futures available, and ten ways for beginners to get started trading them. Open an account with Saxo Bank Group to start trading.
What are futures?
Futures contracts are agreements between two parties to buy or sell an asset at a predetermined price on a specific date in the future. The asset can be anything from stocks and bonds to commodities like oil or gold. Futures contracts usually have a three-month expiry date, but they can also expire within a day or even an hour. When trading futures contracts, traders are betting on the asset’s future price and attempting to profit from their speculation.
Types of futures
Many different types of futures contracts are available for traders, including index futures, commodity futures, equity futures, currency futures, and interest rate futures. Each type has unique features, and you should research them before deciding which one is best for you.
Index futures
Index futures allow traders to invest in the performance of a specific stock market index such as the S&P 500 or NASDAQ 100. These contracts typically track the overall performance of the underlying index rather than individual stocks or commodities.
Commodity futures
Commodity futures contracts allow traders to speculate on commodities such as gold, oil, and wheat prices. These contracts are usually traded on specialized futures exchanges.
Equity futures
Equity futures contracts allow traders to speculate on the performance of individual stocks or groups of stocks. This type of contract is often used by institutional investors and hedge funds for hedging purposes, but it can also be used for speculation by individual investors.
Currency futures
Currency futures allow traders to invest in currencies without actually exchanging any money. The value of a currency’s future is based on the exchange rate between two different currencies at a certain point in time, so they can be used to speculate on the direction of a currency’s value.
Interest Rate Futures
Interest rate futures allow traders to invest in interest rates without borrowing or lending money. Institutional investors and corporations often use these contracts to hedge against interest rate risk.
Ways beginners can trade futures
Now that you understand what futures are, here are some ways beginners can get started trading futures:
Take advantage of free resources
There are numerous online resources available for beginners wanting to learn about trading futures. Free online videos and educational materials can give beginners a solid foundation before diving into real-life trading.
Understand the basics
Before diving into trading, it is crucial to understand the basics of futures trading. This includes familiarizing yourself with the different types of futures contracts, understanding how margins work, and learning about order types and entry/exit strategies.
Practice
Before trading real money, it is wise to practice using a simulator or paper trading account. These accounts allow you to trade with virtual funds in real-time market conditions without risking actual capital.
Start small
When starting, it is essential to start small and trade only what you can afford to lose while still gaining experience. As you become more experienced, you can increase your position size but only risk what you can comfortably lose.
Use stop losses
Stop losses are orders placed to automatically sell your position if the price falls below a certain level. This vital risk management tool should be implemented when trading futures.
Use limit orders
Limit orders allow you to set the maximum or minimum price you are willing to buy or sell a contract. This can help protect you from sharp market movements and ensure that your trades only go through when the conditions are right.
Monitor news
As with any other type of trading, it is crucial to stay up-to-date with news related to the markets you’re trading in. This will give you insight into potential price movements before they happen, allowing you to make better-informed decisions about when to enter and exit trades.
Final thoughts
Futures trading can potentially be a lucrative venture for experienced traders and beginners alike. With the proper knowledge, tools, and discipline, it is possible to make consistent profits from futures trading.
By understanding what futures are, familiarising yourself with the different types of contracts available, taking advantage of free resources, practising using a simulator or paper trading account, starting small and using stop losses and limit orders, as well as monitoring news related to your markets, you can set yourself up for success when trading futures.
