Futures trading can be difficult if investment strategies are not defined and applied properly. Some point to the fact that futures market is also referred to as a ‘zero sum’ game. This means for every profitable trade, there is an equal losing trade.
If you are planning to engage in trading futures, it will be very useful to understand the mechanism behind it. Expanding your knowledge and arsenal of investment strategies before executing trades increase the prospect of success while lowering the chances of losing your funds profit.
There are three fundamental strategies you should consider upon engaging in futures trading:
‘Go long’ means that if an investor expects the price of a particular commodity to increase over given time, he or she may profit by buying futures contracts. However, if the price declines, the trade will result in a loss.
‘Go short’ is the opposite of going long. This strategy profits from an expected decrease in price. Instead of buying a futures contract, you sell it. It practically means that if a commodity price goes down, a profit can be realized by later purchasing an offsetting futures contract at a lower price.
A spread involves trading at least two different contracts in tandem. It is the buying of a futures contract in one month and selling another futures contract in a different month. The purpose is to profit from an expected change in the relationship between the purchase price of one and the selling price of the other.
When you expect a change in both the buying and selling prices, you can take advantage of these price changes to generate profit. You can go long on one contract and short on the other, or you can buy and sell two independent future contracts at the same time with different dates of delivery.
It is essential to make a stop order for your trades. It puts limits on the amount of money that you are willing to lose in futures trading. Stop order is where your broker buys or sells your futures contract whenever its price hits your limit.
To conclude, you may use various kinds of spreads and additionally more complex futures trading strategies to generate high returns. But first, you ought to fully understand the risks involved to avoid heavy losses.
*Information above cannot be considered as an investment advise and past results do not indicate future performance.
**Investors should have experience and understand the risks of losing all the initial investments
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