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Futures and Commodities Trading

Futures  and Commodities Trading Futures and Commodities Trading

While trading any instrument in the financial markets is risky, the individual considering becoming a Futures Trader must understand the financial risks involved. You need to determine how much time you want to invest in trading Futures. If you want to trade your own Futures trading account, be sure the money you plan to trade with is completely discretionary. Make certain you can afford to lose those trading funds and that they are not set aside for anything special such as a college fund or retirement, for example. In general, depending on the broker, a Futures trader would need a minimum of $2500USD, to open a Futures trading account.

Trading Futures can be very competitive among buyers and sellers. The Futures market is extremely liquid and complex. Futures are traded on the Chicago Mercantile Exchange with everything from hogs to oranges to oil as well as emini futures. Traders who plan to day trade Futures normally don’t go very far in depth of the actual Futures market. There are two ‘players’ in the futures markets – speculators and hedgers. Day traders are generally considered ‘speculators’ since they move in and out of any Futures position based on what the instrument is doing now. Futures day traders do not care about what tomorrow will bring for the instrument they are day trading because at the end of the trading session, they are all cash and are not holding any, open positions. Day traders or speculators have no intention of owning the commodity they are trading. Futures day trading is merely an action in an attempt to reap the maximized profit, of any one individual Futures trade, in as short of an amount of time as possible. Futures traders can go long or sell short, any available instrument.

In order for a Futures trader to ‘short’ an instrument, they must have a margin account with their broker of choice. Margin account requirements will fluctuate daily. During high market volatility, margin requirements can be increased by the Futures Broker.

If a Futures Traders margin account drops to a certain level, the broker can initiate a margin call. A margin calls requires the Futures Trader to either make an additional deposit or, liquidate positions. When a margin call is made, Futures Traders should not disregard it and act immediately, accordingly. Futures Brokers have the right to liquidate a trader’s position(s) to make up for any losses incurred.

Because the Futures markets are so heavily leveraged, a small change in a Futures price can result in a huge win or huge loss, for the Futures Trader.

The minimum movement of a Futures Contract is referred to as a ‘tick’. A ‘tick’ is the minimum amount a commodity can move up or down. Trading will shut down on a commodity if prices reach their daily limits which could affect the liquidity of any Futures instrument. The Commodity Futures Trading Commission - CFTC – and Chicago Mercantile Exchange impose limits on the number of contracts or commodity units, any one individual can invest to assure no one person controls the market price of any particular commodity.

Some Futures Traders will trade the ‘spread’ which is the most conservative form of Futures Trading. Trading the ‘spread’ enables the Futures Trader to take advantage of the difference in price of two different contracts, for the same commodity.

Be prepared to spend months, if not years, demo trading before you place your first live Futures trade with your broker. New Futures Traders should utilize a professional Futures Day Trading Room, while in training to become a Futures Day Trader. No individual should attempt to take on the process of day trading futures, without the assistance of a qualified futures day trading room.

Jeannie

June 2013


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