Why the futures trading process is similar to forex trading process

23 Mar 2020

Futures contract is a contract which is drawn up for the supply of a specific commodity in the future at a fixed price. The buyer of the futures contract is obliged to buy the goods in due time, and the seller, in turn, to sell the goods in the specified term. Both commitments relate to the standard quantity of a particular commodity that will be fulfilled at a specific time in the future at the price fixed at the time the futures are concluded.

There are two types of futures: with delivery and without delivery

The first one is mainly used by participants in the real economy. The second kind is used by traders to profit from price fluctuations without a real purchase.

The futures trading process is similar to the Forex trading process. In the futures markets there are similar principles of technical and fundamental analysis, the same indicators, schedules and rules of order placement work. Moreover, initially all of this was designed specifically for the trading of futures, since they appeared much earlier than the Forex market. However, one should not forget that futures trading still has several important differences:

  1. A Forex currency pair can exist forever. Once you buy pounds for dollars, you can hold the position for a very long time - months or even years. This doesn’t work with futures. The futures contract has an expiration date. If you do not close the position yourself, it will be forced to close at the last price on the day and hour of expiration of the futures contract. You must keep track of the expiration date of the futures contract and move on to a later contract in time.
  2. The futures code consists of several parts. The first characters in the designation indicate the product (gold, oil, cotton and so on), the following symbols indicate the month and year of delivery of the futures. For example, NGQ0 stands for Gas Futures (NG - Natural Gas), Q - August.

If you still do not have an account with a broker, you should first open it and recalculate the amount needed to buy the selected futures. Money becomes some insurance in case for the exchange if the purchased contracts become cheaper. Depending on the stock exchange chosen and no matter what the underlying asset is - oil, gold, and so on, a deposit account must have an amount of two to ten percent of the total value of the underlying asset underlying the futures.

The calculation of such amount of guarantee (input margin) is based on SPAN - the universal methodology created as a result of the analysis of price changes on this underlying asset. Markets often use the so-called support margin, when part of money amount in customer accounts is blocked to support their open transactions. For example, at the time of buying or selling a Brent oil futures player must have four thousand dollars in input margin and two thousand - maintenance margin. After the closing of the transactions, during the expiration period, electronic systems, processing orders, automatically calculate the amount of profit or loss which are credited to the accounts or debited from the trading accounts.

What is futures expiration? Futures Expiration is the date on which the terms of the contract between the parties are fulfilled. After such a date, the futures contract on the exchange becomes invalid. Depending on the selected financial instrument, the exchange has different expiration dates, which are mandatory specified in the specifications of the exchange contract. The S&P 500 Index futures contract expires four times a year - in March, June, September, and December. It is not difficult to follow the expiration process as each contract has its own code or code. The contract specification spells out its decipherment and value. When the futures expiration date approaches, many traders and investors begin to close their positions and wait for the new trading cycle to begin. At this time the market becomes thin and easily managed. Unnatural price movements can occur in conjunction with expiration. In the circle of traders, there is an opinion that it is at this point that the big players who are moving the market in their desired direction enter the arena.

 

If you want to make money on futures, then it will be profitable for you to buy it at a discounted price, and to sell, of course, more expensive, which will result in a profit. Then you can buy this contract again when the price does not go down again, then sell it again. This principle is widely known, and it is earned on other investment instruments, such as stocks, bonds, currency, options. Check out reviews4forex.com for more information.


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