Futures trading is a derivatives market that allows traders to speculate on the future direction of an asset's price, such as commodities, currencies, or stocks. It is similar to day trading but requires more focus and discipline due to its longer-term nature. Before getting involved in futures trading, it is essential to understand the basics of how these markets work.
Basics Of Futures Trading
Leverage refers to using borrowed money from a broker or other third party to increase your buying power. For example, if you invested $10,000 into a futures contract and used the leverage of 10:1 (which means borrowing ten times more than the amount initially invested), your total buying power would be $100,000. Leverage can increase profits substantially, but it also increases risk accordingly. Therefore, traders should understand the concept of leverage and use it responsibly.
Another critical point to understand about futures trading is that there is no central exchange for these markets, meaning traders must transact on multiple exchanges to get the best prices. It can add complexity to the process as different exchanges may have different fees and margin requirements, which affects how much money a trader needs to put down to enter a position. As such, traders should look into how much capital they need for each trade before executing any transactions to minimise losses due to miscalculations or unforeseen price movements.
Using a broker when trading futures is advised for most traders, as brokers like Saxo can provide access to multiple exchanges and offer advice on managing trades. However, these services typically come with a fee, so it is essential to research different brokers to find the best service that fits your needs.
In addition to understanding the concept of leverage and knowing how much capital is required for each trade, traders should also pay close attention to margin requirements. Margin refers to the amount of money that must be maintained in an account as collateral for a given position.
When a trader's account falls below the minimum margin requirement, they may face a "margin call" from their broker requiring them to immediately deposit additional funds or liquidate all their positions. As such, traders must understand their brokerage's margin requirements before entering trades.
Traders must understand the various futures contracts available in these markets. Several types include mini contracts, quarterly contracts, and commodity futures. Mini-contracts are a minor type of contract and are typically used for smaller investments. Quarterly contracts have longer expiration dates and are more volatile than mini contracts.
Commodity futures refer to index-based contracts that track the price of a larger basket of commodities like gold or oil. Each contract type has its advantages and disadvantages. Thus traders should research what suits their investment goals before entering any trades.
What Are The Risks?
Futures trading in Singapore can be a lucrative investment opportunity, but it is essential to understand the risks involved before diving in headfirst. As mentioned, leverage can increase profits substantially but also increases risk accordingly. If the price of an asset moves in the opposite direction of a trader's position, the losses can quickly add up and exceed the initial investment.
Furthermore, suppose a trader's account falls below their broker's margin requirements. In that case, they may face a "margin call" from their broker and be required to liquidate their positions or deposit additional funds to maintain their positions.
In addition to leverage-related risks, counterparty risk is associated with futures trading due to its OTC (over-the-counter) nature. In other words, when traders enter into trades with brokers or other third parties, they are taking on the risk that these counterparties will not fulfill their end of the contract or default on payments if applicable. It is, therefore, important for traders to research and vet potential counterparties before entering into any agreements.
Traders should remember that market liquidity can dry up during volatile periods, which may lead to wide bid-ask spreads and significant slippage when entering/exiting trades. This volatility can cause large price movements, resulting in significant losses if not managed properly. For this reason, traders need to keep an eye on market conditions and adjust strategies accordingly based on changes in market conditions.
Conclusion
Understanding the basics of futures trading is essential for anyone looking to enter this market as an investor or trader. Key concepts such as leverage, margin requirements, and different types of contracts should all be studied in depth before executing any transactions. With proper preparation and a sound strategy, futures trading can be profitable.
FAQs
A futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. Typically, futures contracts are traded electronically on exchanges such as the CME Group, the largest futures exchange in the United States.
How do you understand futures trading? ›
Stock market futures trading obligates the buyer to purchase or the seller to sell a stock or set of stocks at a predetermined future date and price. Futures hedge the price moves of a company's shares, a set of stocks, or an index to help prevent losses from unfavorable price changes.
How to trade futures for beginners? ›
How to trade futures
- Understand how futures trading works.
- Pick a futures market to trade.
- Create an account and log in.
- Decide whether to go long or short.
- Place your first trade.
- Set your stops and limits.
- Monitor and close your position.
Futures are financial contracts obligating the buyer to purchase, and the seller to sell, an asset at a predetermined future date and price. They are standardized contracts traded on futures exchanges.
Do you need 25k to trade futures? ›
To apply for futures trading approval, your account must have: Margin approval (check your margin approval) An account minimum of $1,500 (required for margin accounts.) A minimum net liquidation value (NLV) of $25,000 to trade futures in an IRA.
Is futures trading hard to learn? ›
Remember that futures trading is hard work and requires a substantial investment of time and energy. Studying charts, reading market commentary, staying on top of the news—it can be a lot for even the most seasoned trader.
What does 20x mean in futures trading? ›
A 20x leverage means your broker will multiply your account deposit by 20 when trading on leverage.
Can I trade futures with $100? ›
If you are starting with a small amount of capital, such as $10 to $100, it is still possible to make money on futures trading.
Can I trade futures with $500? ›
Some small futures brokers offer accounts with a minimum deposit of $500 or less, but some of the better-known brokers that offer futures will require minimum deposits of as much as $5,000 to $10,000.
Do futures traders make a lot of money? ›
How much does a Futures Trader make? As of Apr 16, 2024, the average annual pay for a Futures Trader in the United States is $101,533 a year. Just in case you need a simple salary calculator, that works out to be approximately $48.81 an hour. This is the equivalent of $1,952/week or $8,461/month.
A futures contract allows its parties to buy or sell a specific underlying asset at a set future date. The underlying asset can be a commodity, a security, or some other financial instrument. These agreements are best entered after you've learned some basics, and should not be invested in on a whim.
How much money do you need to trade futures? ›
There is no legal minimum on what balance you must maintain to day trade futures, although you must have enough in the account to cover all day trading margins and fluctuations which result from your positions. These can vary by broker however some require as little as $500 to open an account.
What are futures in simple terms? ›
Futures are a type of derivative contract agreement to buy or sell a specific commodity asset or security at a set future date for a set price.
Can you make a living trading futures? ›
By focusing on a single market, you can get up to speed quicker. Trading futures for a living is a compelling idea — but to do it successfully, you'll need sufficient startup capital and a well-designed trading plan.
Can I day trade with $5000? ›
A day trade is when you purchase or short a security and then sell or cover the same security in the same day. Essentially, if you have a $5,000 account, you can only make three-day trades in any rolling five-day period. Once your account value is above $25,000, the restriction no longer applies to you.
Is it illegal to day trade with less than 25k? ›
You can day trade without $25k in accounts with brokers that do not enforce the Pattern Day Trader rule, which typically applies to U.S. stock markets. Consider forex or futures markets, which have different regulations and often lower entry barriers for day trading.
Is futures trading good for beginners? ›
Futures investing is found in a variety of markets, such as stocks and commodities, but it's not for beginners.
How much money do I need to trade futures? ›
Two minimums to keep track of
Some small futures brokers offer accounts with a minimum deposit of $500 or less, but some of the better-known brokers that offer futures will require minimum deposits of as much as $5,000 to $10,000.
Is trading futures easier than stocks? ›
It's easy to get started with your futures trading account! Futures trading generally has a lower initial account opening capital requirement than stock trading. With stocks, there are day trading rules that require a trader to maintain minimum account balance of $25,000 which can be a high bar for new traders.
Is futures trading better than stock trading? ›
Futures are contracts with expiration dates, while stocks represent ownership in a company. The following chart may help delineate the major differences between them. No limit to the number of futures contracts that can be issued. As contract prices change (debited) you may be required to provide additional margin.
