To understand futures trading and trade futures, you must first comprehend derivatives trading. Financial contracts whose value is based on the movement of the price of another financial item are called derivatives. The trading price of a derivative gets determined by its underlying asset.
A futures contract is a financial instrument in which a buyer (the one with the long position) and the seller (the one with the short position) sign a contract or agreement. The buyer commits to acquiring a derivative or index at a fixed price at a future date.
The contract price changes over time, resulting in profit or loss for the trader. The stock exchanges that settle this deal and stock exchanges monitor each contract.
What is the best way to trade a futures contract?
Futures get used to hedge commodity price fluctuation risks or profit from price changes rather than buy or sell the actual cash commodity, as is the case with stocks. Stocks, indices, currency pairs, and commodities are the four assets accessible for futures contracts.
Hedgers and Speculators are the two main participants in futures trading. Hedgers use futures to protect themselves against illogical or abrupt price changes in the underlying cash commodity. Hedgers are usually companies or people who deal in the underlying cash commodity at some point.
For example, A corn processor has to increase its payment to the farmer or corn trader if grain prices increase. The processor can “hedge” his risk exposure against increased corn prices by purchasing enough corn futures contracts to cover the amount of maize he intends to acquire. Because cash and futures prices tend to move in the same direction, the futures position will profit if corn prices climb enough to make the cash position profitable.
The second-largest group of futures players is speculators. Independent floor traders and investors are among the participants. Locals, or independent floor traders, trade for their accounts, and trades are handled by floor brokers for their clients or brokerage firms.
Indices are a way to track the price movement of a group of shares on a stock exchange. For example, The FTSE 100 tracks the top 100 companies on the London Stock Exchange. Trading indices allows you to gain exposure to an entire economy or sector all at once by merely opening one position.
CFDs allow you to speculate on the price of indices growing or decreasing without owning the underlying asset. Indices are a highly liquid market to trade, and because they move for more extended periods than most other markets, you can have more exposure to future possibilities.
How to trade indices?
Decide how you want to trade indexes:
You can trade indices with CFDs. CFDs are financial derivatives, which means you can trade indices that are rising in value and declining in value.
Choose between trading cash indices and index futures:
To avoid paying overnight financing charges, many traders will liquidate their cash indices positions at the end of the trading day and open new positions the following day. If you want to keep an index position for a long time, trading index futures will save you money on overnight funding fees.
Log in after creating an account:
To get started, select a trading platform, create an account, and log in.
Choose the index you’d like to trade:
It’s critical to select an index that matches your trading strategy. It will get determined by your risk appetite, available funds, and whether you prefer short-term or long-term investments.
Decide your goals:
Going long on an index means you’re betting on it rising in value while going short means you’re betting on it falling in value.
Set your limitations and boundaries:
Stops and limits are critical risk management strategies when trading indices. A stop order will automatically close your position if it falls below the current market price. Still, a limit order will automatically close your position if it finds a more favorable market price than the current market price.
Keep monitoring your position:
It’s time to open your trade when you think you’re ready to start trading indices. Keep an eye on your transaction and close it when you wish to profit or cut your losses.