Futures contracts are financial instruments traded on an exchange and fall under the derivatives category. They enable traders to bet on the futures of various assets, such as commodities, stocks, or even currencies. This article will explain the two main components of futures contracts and how they work together to potentially produce profits for traders.
Building blocks for futures contract
The first building block of a futures contract is the underlying asset. This commodity or security serves as the basis for settling trades in the market. It can be anything from agricultural products like wheat and corn to financial instruments like stocks and bonds. The second building block of a futures contract is its terms and conditions. These define features such as expiration dates and the amount of money each party must bring to the trade.
When traders enter into a futures contract, they agree to trade a stock or underlying asset at a predetermined price on a set date. The buyer pays a certain amount, called the initial margin, upfront before any trading begins. The exchange holds this money and serves as collateral for both parties. As trading progresses, profits and losses are determined by how far prices move away from the predetermined entry point.
Before entering into a futures contract, it’s essential for traders to understand their risk profile and have enough capital to cover their position no matter what happens in the market. If one trader has more financial resources than another, they may be able to take on more prominent positions, but they must also bear more risk if prices move against them.
It’s also essential for traders to understand the fees and commissions associated with their future contracts. These include commission fees, exchange fees, and other trading costs. Most exchanges offer volume discounts for large orders, which can help minimise the overall cost of a trade. Consider using a broker like Saxo or a trading platform with access to global exchanges and offers competitive commission fees.
Traders should keep in mind that futures contracts are highly leveraged instruments. It means that even small price movements can result in significant profits or losses when considering the leverage used for the trade. Therefore, traders must understand market fundamentals before entering a futures contract.
What are the risks of trading futures, and how can you mitigate them?
When trading futures contracts, traders should be aware of the potential risks associated with their positions. The most significant risk is market volatility since it can cause prices to move in a way where losses exceed initial margins. Traders in Singapore must also consider the size of their positions and understand how they may be affected by liquidity and price movement changes.
Leverage is another risk factor that traders must consider when trading futures contracts. Leveraging can increase profits and losses, so traders must manage their exposure accordingly. As such, traders should only use leverage as they are comfortable with or can afford to lose.
To mitigate these risks, traders should follow a strict risk management plan before entering any trade. This plan should include setting appropriate stop-loss levels and profit-taking rules and determining their acceptable risk level before making any market moves. Additionally, employing sound money management techniques such as diversifying investments and using appropriate amounts of leverage can help reduce exposure to downside risk.
Traders should also take the time to conduct research and stay up-to-date on news events that could impact the markets they are trading in. Keeping abreast of news developments allows traders to make educated decisions about whether they should enter trades based on current market conditions. Additionally, studies have shown that using technical analysis tools can help identify profitable opportunities and reduce overall exposure to risk when trading futures contracts.
If you are new to futures trading, learning from experienced professionals who understand how the markets work is essential, so you don’t lose your entire capital due to simple decision-making. Participating in online forums or attending seminars featuring industry experts can help you understand how different factors affect prices and give you tips on how best to manage your risk while still making the most of your trades.
Summary
Futures contracts are a financial derivative instrument that allows Singapore traders to speculate on an underlying asset’s future price movements. They consist of two main building blocks, the underlying asset and its terms and conditions, which must be understood before entering any trade. Additionally, traders should have enough capital to cover their positions and consider any associated fees or commissions when trading futures contracts. With a solid understanding of these building blocks, traders can make more informed trading decisions.
