Have you heard of futures trading? From day trading to positions trading, many people trade in the futures markets. There are also futures options where traders trade an option contract which is directly related to the underlying futures market.
What exactly are they trading? Future commodity trading is not like the stock market where people buy shares of a stock. You do not actual own anything. You are just speculating on what the price will be of a commodity in the future.
When you want to put on a futures trade, you must first put up margin money. This is in case the market moves against you; you will have enough capital to pay the loss to the brokerage firm.
Although speculators make up the bulk of futures traders, the markets were intended to protect farmers from losing everything. A farmer can hedge in the futures and protect any loss he will have in the cash market. A farmer can sell the futures in wheat. He might do this if he thinks the wheat market will fall before harvest. A bread manufacturer might buy the futures if he thinks the price will rise before harvest. Whatever happens to the wheat market, both will guarantee their price.
A speculator is interested only in trading to make a profit. If he thinks the market will rise, he can purchase the futures. If he thinks the market will fall, he will sell a futures. You do not have to own the contract first to sell it. You can first sell the futures contract.
There is risk in any type of trading. That is why some traders only buy futures options, so they know their risk is limited to what they paid for the option. Others who trade futures contracts use technical analysis like fibonacci trading. They will only enter trades that have certain criteria from the chart analysis.
Related posts: