The majority of investors who invest in financial markets consider that trading in futures is too specialist and perhaps even too complex for the average speculator . There are however may lucrative opportunities once you have understood how the various markets work which should in turn lead to consistent profits once you have grasped the fundamental principles.
The keys to success
Futures markets are essentially where hedgers and speculators pitch against each other to correctly predict whether a price for a commodity , currency or even a market index will rise or fall depending on your opinion and subsequent stance.
As with all forms of financial speculating there are plenty of risks associated with chasing potential short and also long term gains, which can be both rewarding and also very volatile. So which markets should you concentrate on and what are the most successful strategies?
A commodity price is a physical product where the price is driven by pure supply and demand dynamics. You can trade in a wide range of commodities such as cocoa, energy and even precious metals to name just a few from an extremely diverse list of opportunities, where the challenge is always the same whatever you trade in, to predict if a price will rise or fall within a specified timeframe.
If you are of the opinion that a certain commodity is demonstrating volatility and the price is just as likely to rise and fall in equal measure then it is likely that you will use a straddle to create a profit. The aim is to create a situation where you are holding an equal number of calls where you are betting on the price rising and puts, where the price is expected to fall, with the same strike price and expiry date. You could of course take a strong view on whether a price is heading North or South and back that opinion with buy as a call option or open a put option, speculating that the market price is going to fall.
Trading in currency markets
Currencies can be traded in the same way as commodities although a specific hallmark of currency markets is that you are trying to turn a profit from relatively small price movements. A popular strategy that works well in currency trading is scalping. This is defined by the way you build up profits over a period of time by opening and closing numerous trading positions for small profits each time, leading to an anticipated overall healthy profit that has been constructed from numerous trades with small profit margins each time you close your position whenever possible. Scalping also leaves you generally less exposed to larger losses (learn more about liability in currency trading) as you are trading over a short period of time on each occasion.
Timing based strategies are widely used by investors who like to trade Indexes and interest rate futures. A good example of one of the most commonly traded futures markets is the S&P 500 and as this is so popular it can sometimes be hard to find an edge in the prices being offered. To create profits a trader will look to use cycle or seasonal trading. Cycle trading works on the basis of studying historical data and trends with a view to identifying repeating up and down cycles at certain trigger points for an underlying asset, enabling an investor to take advantage of these patterns. Seasonal trading is all about taking advantage of price movements brought about by events that can affect a price such as how the weather has affected a particular crop of simply when a growing season is coming to an end and anticipation about the yield will cause price movements either up or down depending on the news being delivered.
Actually commencing trading in futures markets is probably the most daunting aspect of your intended investment strategy. Most traders not matter how successful they now are, have one thing in common. They would have felt their way into the concept by initially paper trading which simply involves simulating your moves without playing with real money, allowing you to make mistakes and hone your skills without losing valuable capital. Once you have gained experience of all the various trading strategies in a real time environment you will be able to react to situations more easily when you start to trade with real money.
Find your niche
Due to the amazing diversity of markets that you can trade futures in, many investors choose to find a niche such as currencies or a bunch of specific commodities which then enables an investor to develop a deep knowledge of the reasons behind price movements and how to anticipate them for profit. Test your skills in various markets and once you find your niche and understand the strategies that work best for you, you will be well on the way to potential profits.