Futures Trading Education: Fundamental Strategies

Futures Trading Education: Fundamental Strategies

There are three fundamental strategies that futures traders employ: going long, going short, and spreads. Learning them can help a novice investor become successful when engaging in commodities. Education in the various aspects of the industry is necessary in creating profits and avoiding financial loss.

When going long, a trader buys a contract in the hope that the value will increase in the future. He keeps the contract for a relatively long period in anticipation of a favorable price change. 

When going short, the investor is betting on the opposite. The commodity will decline in price as time passes. He sells or shorts the futures contract when the price is currently high and usually seeks to buy it again at a lower price point in the coming months.

Long and short positions involve buying or selling futures contract to take advantage of price fluctuations. Unfortunately, no one can accurately predict the future and the risks are large. Spreads can reduce the uncertainty; instead of entering into a single futures contract, investments are spread into multiple contracts with contrary positions. Calendar spreads are an example of this type of strategy, and involve the simultaneous purchase and sale of two contracts of a single commodity with different delivery dates. Investors seek a profit from the difference between the two positions.

For new investors, going long, short, or trading in spreads can be a confusing experience.  Fortunately, novices can seek advice from a broker. The broker can recommend different strategies and types of spreads, which an investor can adopt until he learns to create his own personal trading strategies. The broker can also recommend tools, such as trading software, which will help an investor analyze market trends and the behavior of various commodities.

One of the ways a broker might recommend that commodities traders minimize the risks involved when dealing in commodities futures is to engage in futures options trading.

Unlike a straight futures contract, a futures option gives the trader the right to buy or sell a commodities contract at a predetermined price. Trading in futures options is an effective strategy to limit risk and leverage. When a trader purchases a futures option, his losses are limited to the price paid for the option. On the other hand, it allows the trader to control a more expensive asset or commodity without having to purchase it outright, as is the case in a conventional futures contract.

There are two types of options available: "call," and "put." Call options give the holder the right to buy a commodity at a given price, while Put options give the right to sell the underlying commodity. Essentially, the options holder has right to buy or sell, while the other party has the obligation to buy or sell. Call and put options can be exercised by the options holder before, or even during the contract expiration date.

Buying call options is a good move for traders who believe that the price for a particular commodity will rise within a certain period. Because they can choose not to exercise their right to buy, or exit the option before the contract ends, they run a much lower risk compared to a straight futures contract.

This is also true for traders buying Put options. If the price of a commodity falls below a certain strike price, they have the right to sell their commodity futures contract to a seller with minimal loss on their end.

While futures trading options can help minimize trade risks, it's important to remember that on its way, options trading can still lead to a loss, particularly if a trader doesn't use any other strategies to complement their trading. In order to be in a better position to profit from the commodities market, it's important to do keep updated on emerging market trends and events.

Understanding the basics of futures trading enables new investors to increase their chances of earning.  Premium and discount futures are brokers' terms which describe the state of a particular futures contract.  When a future is at a premium or a discount, an investor can use an appropriate strategy to maximize gains.

Premium and discount futures describe the relationship of a commodity's price with the spot price. The futures' price is the expected cost of the contract when it matures, while the spot price refers to the cost of the contract on the exact moment of trade or "on the spot." It can also be said that the futures' price is the spot price at the date of maturity. When the spot price is lower than the futures' price, it's termed a premium future. When the opposite occurs and the spot price is higher than the futures' price, then it's a discount future.  This situation can also be called a contango, while the opposite can be referred to as backwardation.

When a future is at a premium, it generally indicates near-term demand.  It is likely that it will trade higher in the coming trading sessions. Premium futures offer a buying opportunity, especially when an investor takes a long position. This situation can normally be found for non-perishable commodities with a cost of carry.

At the other end, discount futures indicate that supply is greater than demand. The market will probably correct itself soon, and a wise investor must be prepared to short sell.

While these general strategies are effective, the trick in maximizing earning potential lies in knowing when to exactly buy or sell. An investor can try to compare historical trends. Some trading software can provide convenient access to historical data, enabling investors to make an educated guess.

However, futures trading is incredibly complex. Exceptions to trends can easily appear. New investors are advised to contact an experienced futures broker for comprehensive advice while learning the ins and outs of investing in this exciting financial instrument.

There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past performance is not indicative of future results.

Another popular form of futures trading is Gold.  Trading in gold futures can provide investors a viable alternative to investing in physical gold bullion, and a useful hedge against inflation. As a commodity, gold offers a number of benefits over other investment classes, including deeper market liquidity, greater leverage, and the option for physical delivery on the contract, among others.

Gold holds an almost universal appeal due to its rarity, versatility, and beauty. Many individual investors physically buy gold coins and bullion as a way to avoid the uncertainties of inflation, and the volatility of other asset types. However, physically trading gold can pose many problems for investors, which makes trading in gold futures a much more viable option for individuals who wish to break into this market.

A gold futures contract is a commitment between traders to deliver, or take delivery of, a quantity of gold on a specific date at a specific price. As with other commodities, gold options contracts are also available, giving traders the right to deliver, or take delivery of the commodity without the obligation inherent in a futures contract.

An important advantage to trading in gold futures is the fact that because they are traded at centralized exchanges, futures contracts offer more financial leverage, flexibility, and financial integrity as opposed to physically trading this precious metal. Traders only need to put up a percentage of the contract cost, which means that a considerably smaller capital is required compared to a physical trade. Of course, this leverage means that there is the potential for higher risk and higher returns when trading in futures contracts.

As one of the leading commodity brokers in the industry, Cannon Trading has helped clients all over the world achieve their trading goals. We have been in business since 1988, and have received several customer service awards, and consistently maintained good standing with the NFA and CFTC.

For over 20 years, Cannon Trading has helped clients all over the world achieve their trading goals in the lucrative commodities futures trading market. Day trading futures can be overwhelming for newcomers who are just venturing into the field, but with the help of a professional, traders have a better chance of achieving success in the field of commodities trading.

Our professional commodities brokers will work with you to understand your specific trading style and requirements, and provide you the essential advice and information you need to thrive in this highly lucrative market.

Cannon Trading's Broker-assisted Trading solution provides traders who are new to the field with the essential advice and tools they need to accelerate their understanding of the gold futures market or any other futures market they desire to trade in. 

Cannon Trading specializes in trading U.S. treasury bonds, stock indices, foreign currencies, precious metals, crude oil, agriculture, and other products on the futures and commodity exchange, including futures options. Our brokerage services are designed to help traders acquire the knowledge and resources they need to engage in commodities trading.

Investors who are new to the commodities market can take advantage of the knowledge and experience of our Broker-Assisted Trading program. An experienced futures broker can provide invaluable advice on the various commodities markets, and help traders gain insight on possible strategies and trading styles to maximize their investments. Aside from the assistance of a professional broker, we provide access to quotes, charts, news, and research to help clients make informed trading decisions.

More experienced traders who want to have fast and efficient market access can choose our Self-directed Online Trading service. We offer a wide variety of trading platforms to suit our clients' individual trading styles and risk tolerance. From clients who primarily engage in day trading futures, to diversified traders and options specialists, we have the tools and resources you need to achieve your trading goals. Self-directed traders enjoy very low commission rates and have access to invaluable resources, to help ensure that they have the latest market information they need for successful trading.

Aside from helping individual traders break into the commodities market, Cannon Trading provides professional traders and institutions superior trade and clearing services. We can create trading solutions designed to fit the needs of institutional futures traders. Aside from offering more than 10 trading platforms, we have the ability to custom-fit back office solutions, and manage risk for multiple traders. We also offer aggressive commissions and day trading margins, as well as the lowest available commission rates for our high-volume traders.

Futures trading can be complex and risky, but with broker assistance, a trader can prepare himself for success. Brokers at Cannon Trading are experienced, knowledgeable, and available whenever you need them. 

Ready to start trading futures? Call 1(800)454-9572 and speak to one of our experienced, Series-3 licensed futures brokers and start your futures trading journey with E-Futures International today.

Disclaimer - Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.