In the world of investing, successful investors are those who diversify their investment portfolio with different asset classes, so as to minimize risk of some asset classes not performing well in the market.
As an investor or soon to be investor, you should know that diversification of your investment portfolio is a great way to manage the risk that comes with investing in different asset classes, and also it is a great way to earn so much returns if the market tends to do exceptionally well within the year.
One of the best ways to spread out your investment portfolio is by investing in futures. Futures trading is a popular form of derivatives trading.
It is a form of trading used for hedging or capitalizing on price changes in various assets like stocks, commodities, currencies, and indices.
By investing in futures, you are exposed to various asset classes like commodities (oil, wheat, natural gas, etc) which are not easily available in any other market.
Futures give you the opportunity to invest in various commodities which can be of great benefit to your portfolio.
Example: You might find out that the price of natural gas might go up in 3 months, and you want to leverage on that opportunity to make more money.
By investing in a futures contract for natural gas, when the price goes up, you can sell this contract for more, thereby increasing your returns on this investment.
In this article, I will be explaining all about Futures, and how to get started with this form of Trading.
What is Futures Trading?
Futures trading involves speculating on the future price movements of assets like stocks, commodities, currencies, and indices.
It revolves around contractual agreements between buyers and sellers, where they commit to a predetermined price and date for asset exchange.
Traders can profit from anticipated price fluctuations without owning the assets directly.
Futures trading provides a regulated environment, standardized contracts, and leverage options, amplifying potential gains and losses.
It offers liquidity and transparency, making it an accessible and dynamic form of derivatives trading.
What are Futures?
Futures are financial contracts tied to the price movement of indices, securities, cryptocurrencies, 신뢰 지갑, or commodities.
Buyers commit to purchasing assets, while sellers commit to selling and delivering them on a future date.
These contracts allow traders to profit from anticipated price changes without owning the assets. And also allow the traders involved to lock down a specific price of a commodity or asset no matter the change in market price.
Futures provide opportunities for risk management, hedging, and seeking profits. They enable investors to participate in various markets without owning the underlying assets.
NOTE: Futures aka Futures contracts are mostly traded on a stock exchange, and sometimes on a crypto exchange.
Example of Futures Trading?
Suppose an investor has a capital of $1000 and wishes to engage in Bitcoin futures trading with leverage.
With a leverage ratio of 10x, the investor can control a position that is ten times the size of their capital.
Considering the current price (as of the time of writing this article) of Bitcoin at $26,255.81, the investor can enter into a leveraged Bitcoin futures contract that allows them to control a position with a notional value of $10,000 ($1000 x 10). This means they can trade as if they had $10,000 in capital.
If the investor expects the and decides to go long on the futures contract, they can use their $1000 capital as a margin to secure the position.
With leverage of 10x, their position is now worth $10,000.
If the price of Bitcoin increases by, for example, 10% over a certain period, the investor’s position would appreciate by 10% as well. In this case, the position would be worth $11,000 ($10,000 + 10% of $10,000).
It’s important to note that leverage can amplify both profits and losses.
While the investor’s potential gains are magnified with leverage, so too are the potential losses. If the price of Bitcoin moves against the investor’s position, their losses would also be magnified.
Benefits of Futures Trading?
The following are the benefits of futures trading:
Risk Management
Futures contracts act as a hedge against price fluctuations, protecting against potential losses in the portfolio.
Leverage
With a small upfront payment (margin), investors can control larger positions, amplifying potential profits.
Liquidity
Futures contracts trade on exchanges or futures markets with high liquidity, allowing for easy entry and exit of positions.
Diversification
Futures trading provides exposure to various assets, enabling portfolio diversification and risk spreading.
Speculation
Investors can profit from anticipated price movements by taking long or short positions in futures contracts.
Transparency
Regulated exchanges ensure transparent pricing and standardized trading rules for all participants.
Price Discovery
Futures contract prices provide insights into market sentiment and future asset price directions.
Tax Advantages
Depending on the jurisdiction, futures trading may offer tax advantages, potentially reducing tax liabilities.
These benefits make futures trading a valuable tool for risk management, profit generation, and portfolio diversification.
How to start trading futures
To begin futures trading, you need to start by educating yourself about this form of trading.
You should know that futures trading is not advisable for beginners. This is because it is very volatile, and complex to predict the market or trade futures contracts.
Next, choose a reliable broker who has a good track record of trading futures. Create a trading plan with your chosen broker.
Then open a trading account on any Futures trading exchange like DIFX
It is advisable to first practice futures trading with a demo account. With this account, you can start with small positions, implement risk management, while monitoring and evaluating trades,
Frequently Asked Question
How do futures traders make money?
Futures traders profit by speculating on the price direction of securities, commodities, or financial instruments.
They take long or short positions in futures contracts to capitalize on price increases or decreases.
Successful traders use strategies like trend following, breakout trading, and spread trading to seize market opportunities and generate profits.
What is futures trading in crypto?
Crypto futures trading involves trading futures contracts based on cryptocurrencies like Bitcoin and .
Traders enter into legal agreements to buy or sell the underlying cryptocurrency at a predetermined price on a future date.
Crypto futures allow investors to speculate on price movements without owning the actual assets, providing exposure to the crypto market and potential profit opportunities
Is crypto futures the same as Forex?
No, crypto futures and Forex differ. Forex trading involves fiat currencies regulated by governments, while crypto futures focus on digital assets.
Cryptocurrencies operate on blockchain technology and are decentralized, while Forex revolves around traditional fiat currencies.
Although both involve price speculation, their underlying assets and market dynamics are distinct.
What exchanges support futures trading?
Prominent exchanges supporting futures trading include the Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), Binance, and DIFX.
These exchanges offer platforms to access and trade futures contracts for various assets, including cryptocurrencies.
Traders can leverage these platforms to speculate on crypto price movements.
Which coin is best for futures trading?
The ideal coin for futures trading depends on individual preferences, market analysis, and risk tolerance, with Bitcoin being popular due to its liquidity and market dominance.
Other popular coins are Ethereum and Solana.
