Futures. Everything a trader needs to know

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Futures. Everything a trader needs to know

 

Futures or futures contracts – one of the variants of trading contracts, providing for bilateral obligations of the parties to the transaction. In fact, the futures agreement regulates the obligations of one party to buy and the other to sell certain volumes of assets at a predetermined price in the future. That is, futures do not imply an immediate exchange of money for certain commodity assets (currency, securities, raw materials or materials). They only regulate compliance with the obligations assumed by the parties, i.e. payment at the time of entering into the transaction and delivery of the assets within the time limits specified in the contract.

(For a complete list of proven brokers for futures trading, please go to the section Brokers with futures trading)

As goods under futures contracts can be sold:

  • wood
  • gold
  • grain
  • steel
  • cotton
  • currency.

Currency futures contracts are concluded for a standard term of three months (quarterly). At the same time, their analytical prospects and opportunities are much more obvious than those that are present in the framework of forex trading.

The history of futures dates back to the 18th century, when contracts for the supply of rice were signed by Japanese producers before the harvest. In our familiar legal form, futures began to be used a century later by grain traders on the Chicago Stock Exchange.

Futures: Purpose and pricing

Why do you need futures? In general, this type of contract was created in order to minimize the risks of future deliveries, freeing them from market dependence. If simpler: the goods will in any case be delivered at the originally named price, regardless of the value of the assets at the time of delivery. What are the benefits for the suppliers here? In the guaranteed performance of obligations of the buyer. What’s the benefit to the buyer? He will in any case receive the goods purchased, regardless of his financial position at the time of delivery.

All futures contracts can be divided into two categories: non-delivery and delivery. What is the point of this separation? The fact that delivery contracts imply the transfer of assets to the full disposal of the buyer. Whereas under non-deliverable contracts, assets are only transferred to the buyer for a period of time and after a specified period of time, the owner is replaced on the basis of a reverse transaction. It should be noted that no more than 1% of futures contracts are concluded for direct delivery of goods/assets. All other transactions of this kind are concluded in the hope of profit.

The value of futures dictates the market: increased demand gives rise to a price increase, the fall in demand – the fall in value.

In addition to the futures themselves, one can find the notion of futures options, i.e. transactions that do not oblige but give the right to buy/sell futures at a fixed price within a specified period of time. In this case, within the framework of the transaction, a special amount is paid, called a bonus – as if a ransom for the right to conduct the transaction at a convenient time for the player.

Futures Trading and Forex

Of course, the convenience and transparency of futures transactions couldn’t help but interest stock speculators. They are the ones who have turned futures contracts from real ones into virtual transactions that do not seek to acquire assets. In this case, the speculator only considers the benefit that he could get by reselling the futures with the increase in its value.

Futures contracts have significant similarities to Forex contracts. To build analytical calculations, these types of trading transactions require the same methods of analysis, while forecasting price fluctuations, the same charts, indicators, calendars of important events and stop-levels that limit the growth / fall of the price are used. Accordingly, any more or less experienced forex trader can easily replace transactions in the foreign exchange market with futures trading. But does it make sense to do it?

In fact, according to the statistics, 9 out of 10 futures deals turn out to be profitable. On Forex this proportion will be inverse – 10% of winning trades against 90% of losses. What is the difference and what is the reason for the superiority of futures trading over currency trading?

Forex or futures trading?

There’s a difference, and it’s significant. Forex market is not regulated by any state or private structures, it belongs to the category of interbank trading institutions, but in fact it is completely speculative, i.e. depends on the level of demand and supply. Accordingly, it is rather difficult to manage it and predict the development of the trade situation, at least because the balance of supply and demand can be changed at any time due to the consolidated actions of major players.

Futures trading is a centralized, transparent process. Futures are traded on the Chicago Stock Exchange, which has its own clearing system where price movements can only bring profit/loss to the parties to the contract – neither the intermediaries nor the trading floor will benefit from it.

Futures do not imply the use of the trading spread – instead, a reward calculated from the bid/ask price difference is assigned. The amount of commission payments largely depends on the number of contracts – the more they are, the less the rate will be.

The main problem of Forex is that the market is not transparent – its ordinary participants do not know the volume of transactions, and the data on trading operations are not accumulated centrally, but come in fragmented form. As a result, each trader acts, in fact, at his own discretion, conducting transactions with unpredictable or poorly predicted level of risk.

Futures trading: how to choose a trading floor and broker

Most of the exchanges available for futures trading offer approximately the same set of investment instruments. The only exception is the trading floors offering specific futures contracts. Thus, promotional futures of Yandex can be purchased only in FORTS, which is a section for trading options and futures on RTS-MICEX.

However, the choice of a trading platform is not as important as the choice of a broker. After all, it determines how diverse the choice of investment instruments will be. Today, the majority of intermediaries offer their clients work with several trading floors at once. Due to the automation of the process, this approach really allows for a higher speed of interaction, and this already gives ample opportunities for strategy selection. The futures market is extremely popular with scalpers – the players who prefer to make mass short-term transactions in the framework of intraday trading.

What does it matter when choosing a broker?

1) Availability of necessary assets in the range of intermediary’s proposals

The majority of traders in the futures market use one type of assets in trading. That is, if you are convenient to trade only on currency futures – it is necessary to pay attention only to their availability. If you prefer gold as an investment instrument – it will be enough if the broker works with CME Group or FORTS. Asian indexes will require access to Asian exchanges, particularly the Singapore SGX/SiMEX. In general, the availability of access to the following trading floors is the best guarantee that there will be no problems with the choice of assets:

ICE Group is a Canadian stock exchange;

CME Group is a U.S. stock exchange;

NYSE LIFE is a trade-oriented exchange in the USA and Europe;

LIME – British Exchange;

CBOE is a U.S. stock exchange;

EUREX – European Exchange;

TOCOM – Japanese stock exchange;

SFE – Australian Exchange;

HKFE – Hong Kong Stock Exchange;

FORTS is a Russian stock exchange;

SGX/SiMEX – Singapore Stock Exchange

Liquidity should not be forgotten either – it is very important when trading futures contracts. Otherwise, the implementation of a low-value contract may be delayed, and as a result, instead of profit you will receive an uninspired contract and a fine from the stock exchange, and the broker will inevitably increase the spread on future transactions.

2) Warranty obligations

A mandatory condition for the work of a broker on the exchange is membership in the clearing chamber of the trading floor. In fact, this is the moment that guarantees the legitimacy of the transaction and makes it possible to ensure the execution of trading operations.

In addition, the broker must belong to one of the market regulators – the CFTS Commission or NFA. In this case, the broker guarantees the clients the opportunity to use the most actual quotes and to apply to arbitration for any of the transactions. And the trader’s account in this case will be protected from the influence of force-majeure factors – bankruptcy or stoppage of the broker’s activity for reasons unrelated to the finances.

3) Technical support

In fact, there is no single trading terminal for working with futures. People’s craftsmen adapt the “MT4”, created for forex, for this purpose, but even after that it only allows you to trade CFDs on futures, but not the futures contracts themselves. Most brokers working directly with futures markets have their own trading equipment, which allows the trader to get a convenient access to trading operations.

What is important to pay attention to when working with the trading terminal:

  • user-friendly interface;
  • the presence of demo access;
  • availability of Trading Desk;
  • Tech support in the trader’s native language.

Futures VS forward operations

The question often arises: how fundamental is the difference between futures and forward contracts? Actually, there are differences, of course:

1) The most important difference is the difference in markets – forward contracts are traded on interbank exchanges, while futures contracts are traded on stock exchanges. At the same time, futures transactions are always standardized and brought to common denominators, while forward ones allow stipulating the terms and conditions of transaction volume and terms between the parties.

2) Currency futures limit the choice of trading instruments. Not all currencies are available here, and the main currencies are the U.S. dollar, pound sterling, euro and Japanese yen. For forward trades, this range is much wider.

3) Forward contracts are most often available only to large investors (the average transaction amount is 500 000 USD). Futures allow both large and small players to take advantage of the market opportunities without limiting their rights and investments.

(4) 9 out of 10 futures contracts do not result in the delivery of the acquired assets. Transactions are closed with the help of reverse operation, and the income of traders is a speculative difference in bid/sell prices. Forward contracts almost always end with the delivery of the goods purchased.