The Basics of Futures Trading

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Futures trading is a popular way to profit from the price fluctuations of commodities, stock indices and even cryptocurrencies. However, before you start buying futures contracts, it is important to understand how they work and what the risks are. Read more

First, the risk of losing money in futures trading is high because the underlying commodity or security in the contract is marked to market on a daily basis. This means that the value of the contract can change dramatically and you could be required to deposit more funds in your account on days when the underlying asset or security is trading lower than the current market price.

You can avoid this by working with regulated brokers and using futures trading platforms that are licensed by the Commodity Futures Trading Commission (CFTC). Some online trading platforms offer demo accounts, which let you practice without putting real money at risk.

How to Use Leverage Effectively in Futures Trading

There are two types of traders who participate in the futures market: hedgers and speculators. Hedgers seek to protect a certain level of price by selling a futures contract, while speculators seek to profit by predicting changes in prices.

Hedgers tend to be risk-tolerant and primarily use futures trading as a way to hedge their investments in a portfolio of stocks or other securities. This is because stocks are subject to the same swings as a futures contract, and the hedging strategies can help limit losses from these swings.

In addition, hedging can help you avoid paying excessive margins or fees on futures transactions. Margin requirements can be as low as 5% or 10%. But, you need to be aware of the risks associated with these margins and make sure to monitor the underlying assets in your portfolio carefully.