Trading Futures

As a trader you need to determine what vehicle to trade, as well as what market(s) to trade. My focus is on trading Futures contracts, which are exchange traded derivatives. Wikipedia has a thorough explanation of Futures contracts here.

Basically a Futures contract is a commitment between two parties to buy/sell a position. There has to be the same number of buyers and sellers. Hence Short selling is a natural part of the mechanics. Short selling has received a lot og negative press in the wake of the Credit Crunch, however in the Futures markets it is absolutely necessary. The market wouldn’t work without it!

The Futures markets are commonly known to consist of commodities, but you may also trade currencies, share indices and more.

There are a number of reasons why I prefer trading Futures:

- Commodities are driven by supply and demand, as opposed to equities/shares in companies where there are all sorts of factors determining where they’re heading. There are no Soybeans board members doing stupid things resulting in the price going South…

- Futures are highly leveraged and without the financing cost of CFDs. I refer to high leverage as a positive thing, but don’t forget that it also means high risk. However note that CFD trading has a lower entry level as you can start with smaller position sizes and a smaller trading account.

- Access to currencies, which is the most liquid market in the world. You can of course also trade currencies via the over-the-counter Forex market.

- Commodities and currencies suit my style as a technical trader using “mechanical” analytic tools.