14Jun/110
Intro – Making Money from Futures Trading
Futures trading is a great way to make profits from trading in the markets but only if you know what you’re doing. The way the futures market works is that traders make bets on whether the price of a particular product, currency or index will go up or down some time in the future. There are three types of futures markets:
- Commodities markets where speculators bet on the price fluctuations of physical products such as agricultural commodities, oil and precious metals by taking out put or call options that give them the right (but not the obligation) to buy or sell a particular product at a particular strike price and as of a given expiration date. Commodities traders may also use a straddle option wherein they hold the same number of put and call options on a particular commodity, in the expectation of price volatility in the short-term.
- Currencies markets where traders speculate on currency pairs. The most common strategy used by currencies speculators is scalping, where traders make short-term profits from small changes in the exchange rate. With a series of successful trades over time, these small profits can add up to a substantial amount at the end of a particular trading period.
- Stock index trading involves speculating in futures contracts requiring the holder to buy or sell the cash equivalent of a particular stock index, most commonly the S&P 500. By purchasing futures contracts, the holder gets to speculate on the general movement of the market rather than on one or two equities, helping hedge against the risk of a bad investment. The two main strategies for index trading are cycle trading and seasonal trading. In cycle trading, the speculator implements a trading strategy using a study of historical data to determine possible up and down cycles. In seasonal trading, the speculator makes his trading decisions using the effects of various seasonal trends on the markets, which are seen to recur year after year.