Mastering Futures Trading: An Easy Beginners Guide

A Beginner's Guide to Understanding Futures Trading

Futures trading is a method that allows traders to potentially earn higher profits by speculating on future price movements.

In this type of trading, participants buy and sell an asset, but the actual delivery and ownership occur at a later date.

The future price of the asset will ultimately determine the profit or loss from the trading.

For instance, you might agree with a seller to purchase a certain amount of gold at its current price, but you only pay a deposit upfront and defer the full payment until later.

If the market price of gold rises during this time, you benefit from the deal. By paying a small deposit and locking in the current price, you have effectively postponed both the delivery of the gold and the payment of the remaining balance.

However, once you make the deposit, you assume the risk of any potential profit or loss.

The main drawback of futures trading is the inherent risk, as market fluctuations can move against your expectations.Follow this article to learn about the features of this type of trading and learn futures trading for beginners.

 What are futures trading?

In a typical trading, the buying or selling of assets occurs simultaneously with their delivery. However, in futures trading, traders engage in the purchase or sale of assets—such as stocks, currencies, or cryptocurrencies—at present, while the actual profit or loss from the trading is realized at a later date.

If the asset's price rises by the delivery date, the buyer profits and the seller incurs a loss; conversely, if the price falls, the outcomes are reversed.

What is the reason for the higher risk of futures trading is the possibility of using leverage in this type of trading. By using leverage, traders can borrow multiple times their assets from the exchange or capital broker and use it in their trading.

If a loss occurs, the trader may lose or multiply a large part of his assets that he had pledged to borrow. By following the tips of capital management and adjusting the loss limit, the risk of futures trading can be controlled to a significant extent.

Two Way Markets Vs One Way Markets :

 What’s the Difference?

A market in which traders make a profit by buying an asset at a lower price and selling it at a higher price is called one-way. In a one-sided market, profits are derived solely from the increase in the price of the asset. In contrast, a two-sided market allows traders to profit from both rising and falling asset prices In two-way.

markets, there is also a concept called borrowing. In short selling, the trader borrows shares or any type of asset whose price is likely to decrease in the future and proceeds to sell them in order to buy them again when the price decreases and while making a profit, borrow Give yourself back too.

In borrowing buying, the trader borrows some of an asset in the hope of increasing its profit, so that if the price increases, it will make a profit by selling it. The important thing about buying and selling on borrowed money is that traders benefit from its price changes without owning the asset and only by borrowing it.

The connection between futures trading and the two-way market is that both of these things depend on future predictions, and many traders operate in the two-way market using futures trading.

For example, in the cryptocurrency market, when doing futures trading, you can choose the type of trading, borrowing purchase (Long) or selling borrowing (Short) according to your forecast.

Suppose two people trade in the same market. Person A predicts that the price of this asset will exceed $20,000, so he opens a long (buy) transaction; But person B does the opposite of this prediction and opens a short (sell) transaction. On the specified date, the price of the property will be 15 thousand dollars. As a result, person A loses five thousand dollars and person B gains five thousand dollars.

In which markets are futures traded?

1-Digital assets
2-gold
3-currency
4-stock
5-commodity
6-oil
7-Interest rate

Types of futures trading

Futures trading can be divided into two categories in terms of time.

1-Maturity futures contract

2- Future trading without maturity

Future trading with maturity

In this method, the buyer and the seller undertake to complete the trading on a specific date and with a specific amount. At the time of maturity, price fluctuations have no effect on the agreement made and the parties must fulfill their obligations.
Suppose the factory owner concludes a contract to buy crude oil in the form of futures with the refinery.

As a result, the parties agree to deliver the oil on a specific date and amount and receive the money. If the price of oil increases or decreases at maturity, there will be no difference in the terms of the contract and both parties must fulfill their obligations.

Futures without maturity

The second type of this contract is without maturity, which is also called Perpetual Futures and is very popular among traders. Many people who work in markets such as digital currency, oil, etc. are very interested in using this type of contract. In this model, the asset price is determined; But the delivery time is unknown.

Settlement method in Future

One of the features of futures trading is the variety of settlement methods. Buyer and seller can choose one of the available methods according to their needs. In the following, we describe their types:

1- Cash settlement

2- Physical settlement

3- Combined settlement

4- Non-standard settlement

1- cash :

One of the methods used in futures trading is cash settlement. In this case, the payment of the trading amount is calculated and paid based on the difference between the daily price and the price mentioned in the contract. They use this method for trading currencies, natural resources, consumer goods, etc. due to its high speed.

This method is used in contracts that have a specific expiration date.

2- physical :

In this method, the seller must deliver the traded asset to the buyer on a specified date and receive the agreed amount. Physical settlement is used when the transaction is capable of physical delivery. For example, this type of contract can be used for oil, gold and agricultural products trading.

3- combined :

In this method, cash and physical settlement are used at the same time. That is, part of the contract is settled by physical transfer of assets and another part is settled by cash payment.

4- non-standard :

In the non-standard method, the settlement is not done in the usual way, and it is the agreements between the parties that determine its model. This method is suitable for certain industries or trades where the characteristics or characteristics of the product determine how to value it.

For example, in a bitumen futures trading, the parties may agree that the final price will be calculated based on the daily price of oil or bitumen composition.

Advantages of trading futures
Futures have various advantages, the most important of which are mentioned below.

1-Risk management:

Using this method, companies and investors can significantly reduce market risk and prevent possible frauds.
 

2-Two-way trading:

In futures trading, there is the ability to buy and sell assets in both directions of the market. This feature allows users to profit from the market in any condition.
 

3-Determining the value of the asset:

In the futures market, the price of the asset is determined in advance and none of the parties can distort it at the time of maturity.

Disadvantages of trading futures
Along with many advantages, futures also have disadvantages that we mention.

Liquidation: Some investors make the big mistake of putting their entire capital into the market or using borrowed money. In such a situation, if your prediction is wrong, you will lose all your capital. So it is better to never make this mistake with the greed of getting wealth.Leverage and margin: Leverage and margin are like a double-edged sword that can increase your profit or loss. The wrong use of these features can completely destroy your capital.

Who are futures suitable for?

1-Short-term traders: People who want to profit from market changes in a short period of time. By correctly predicting the future of an asset in the short term, they can increase their profits.

2-Companies: Companies can use this method to reduce the risk of price changes of raw materials, currency and sales of their products. This makes them not have to worry about the preparation of raw materials and the sale of manufactured products.

3-Professional investors: Futures trading is suitable for people who have a lot of experience and knowledge in the market; Because they can significantly reduce their risks and increase the amount of capital return.

Terminology related to futures trading : 

To better understand a market and how to trade in it, it is better to familiarize yourself with its terms.

1-leverage: (Read the full article on Leverage)
One of the attractions of futures trading is the possibility of using leverage. By doing this, you can increase your profit significantly. The amount of leverage is completely different depending on the type of broker or exchange you choose.

2-Margin & Call Margin:
Traders need an initial capital to use as collateral to enter into a trading. Note that if your prediction of the market is wrong, when your capital reaches a certain number, the transaction will be closed automatically and your capital will be lost. This is called liquidation or call margin.

3-Long position:
This term refers to when you enter a trade in the direction of the market going up.

4-Short position:
In fact, when you enter a trade in the direction of a market decline, you have opened a short position.

5-Take profit:
 means the profit limit that you have specified for your trade.

6-Stop loss:shows the level of risk you take in a transaction. As soon as the price crosses your loss limit, the trade is closed.

Also Read

How to manage our risk in futures trading

 

 conclusion

futures trading offers a unique opportunity to speculate on price changes and potentially earn significant profits. While it carries risks, understanding its mechanics, such as how to manage capital and recognize market trends, can help beginners navigate this complex landscape.

By familiarizing yourself with the essential terminology and strategies outlined in this guide, you can take the first steps towards becoming a knowledgeable trader. Start exploring your options today, and remember that informed decisions are key to success in futures trading.