In this article, we’ll be taking a deep dive into the future. We’ll touch on the types of assets that can be traded using futures, and the advantages and general why trade futures from the global traders. Futures are essentially derivative financial contracts through which traders agree to buy or sell financial instruments (assets) in the future on a specific date and for a set price. They are often used to speculate future price movements to maximise profits or as a hedge against risks. CFDs (Contracts for difference) on futures allow you to speculate on the price of a wide range of assets which include commodities, indices, and energies.
What does a futures contract specify?
A futures contract states how many units of a particular underlying asset will be purchased or sold. It also specifies the agreed-upon price and the date on which the transaction will occur. This is referred to as the expiration date and is when the contract is settled. Futures contracts are typically cash-settled (no direct transfer of the asset) or physically settled (the underlying asset is physically delivered to the buyer).
What assets can be traded using futures contracts?
A wide variety of assets can be traded using futures contracts. This includes currencies, commodities, shares, cryptocurrencies, indexes, etc.
Why futures appeal to all kinds of traders
There are many reasons that traders choose to trade futures. Let’s take a look at some of them.
- Leverage. Futures are highly leveraged. This means a trader is only required to deposit a small percentage of the contract’s total value (margin) while getting greater market exposure. However, leverage does come with risk as it also increases a trader’s exposure to negative market movements. A risk management place is key to mitigating large capital losses.
- Liquidity. A large number of future contracts are traded daily, making them very liquid. This also means: future contracts can be placed quickly. prices don’t rise and fall drastically (particularly for contracts nearing maturity).
- Access to a wide range of markets. Future contracts enable traders to speculate on the value of a broad scope of financial instruments. This includes currency, energy, commodity, and index futures. Further, many futures markets trade offer extended trading hours, increasing your opportunity to execute more trades and make a profit.
- Competitive Pricing. Online brokers like T4Trade, popular amongst traders across the globe, seek to provide the most optimal market prices to their traders.
- Avoid overnight charges. Futures positions have no overnight funding charges whereas charges apply to spot positions that are left open at the end of a trading day. Futures trading is preferred by traders who wish to take a longer-term position on an underlying market because they won’t incur multiple overnight funding charges.
- Hedging. Futures offer a way to hedge different types of risk. With futures, a trader can hedge the price movement of an underlying asset to reduce potential losses from unanticipated price spikes. Futures are also used to hedge foreign exchange risks, interest rate risks (in the case rates drop), and price risks associated with commodities.
Diversification
Futures offer a pivotal way for a trader to diversify their portfolio:
- Futures offer access to a broad variety of assets that may be otherwise hard to find.
- They also offer direct market exposure to underlying assets (e.g., commodities).
- Futures are often used as an effective way to manage risk (risk diversification).
Maximising profits (while managing risk)
Futures offer traders leverage and greater market exposure, increasing the potential for making profits. However, as quickly as a trader can make money, so too is their risk of losing money magnified. As with all types of trading, having a proper plan to manage risk strategically is important. A plan of this type is typically based on one’s skills, expertise, risk tolerance, and knowledge of futures trading specifically.
Another way to better manage risk is to practice futures trading using a demo trading account. A demo account offers a trader a simulated trading environment in which to test their trading strategies using virtual money. Once you’ve gained sufficient experience and the confidence to trade using your own funds, consider moving to a live trading account.
In conclusion
Futures are a great way to diversify your trading portfolio. They offer leverage and come with high liquidity. However, it is important to monitor any open positions that may make you vulnerable to large losses. Have a strategic trading plan in place and gather as much information as you can about trading futures. This will help you make more informed trading decisions, and understand the advantages that come with it, as well as the risks.
Trading with T4Trade
T4Trade is a powerful global broker with clients from countries worldwide. The broker has quickly gained popularity for its top-tier customer support and expertise in trading. T4Trade’s MetaTrader 4 platform offers traders an extensive range of cutting-edge trading tools to help them become more strategic traders. T4Trade’s innovative Academy also delivers a broad scope of educational resources that includes insightful webinars, podcasts, and video-on-demand.
In addition, an in-house team of top analysts deliver trading tips and market insights to improve your knowledge. Informative blogs and FAQ pages further enhance the learning experience.
Other reasons to choose T4Trade are:
- access to a wide range of financial instruments across 6 asset classes (i.e., futures, forex, commodities, metals, shares and indices)
- flexible leverage
- tight spreads
- fast execution
- easy deposits or withdrawals
- security of funds with top-tier banks
- 24/5 support from a multilingual team
