Whats Your Digitaliq Blog The Basics of Futures Trading

The Basics of Futures Trading

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OnlineFuturesContracts trading is a popular way to invest in a variety of commodities, currencies, and interest rates. The exchange-traded market is centralized and offers liquidity, low margins, and standardized contract specifications.

Liquidity: Ability to sell an investment at or near its value in a relatively short period of time

To trade futures, traders must have an initial margin amount on hand with their broker. This amount is designed to protect them against loss, but it also enables them to leverage their money to gain a higher potential return.

Margin calls: A margin call occurs when the amount of money held in a futures account is less than maintenance margin, which is set by the exchange. This requires traders to replenish their accounts or their broker can close their position.

The Importance of Liquidity in Futures Trading

Risk management: The risks of futures trading can be significant, so it’s important to develop a strategy that addresses entry and exit strategies, as well as risk-management rules. For example, a long futures trade may use technical analysis to locate the entry point and a stop-loss order placed 5% below the entry price to manage downside risk.

Diversification: It’s common for investors to diversify their portfolios by focusing on different sectors and markets, including those in the oil, energy, gold, and metals industries. By doing this, they can take advantage of changes in those sectors that could increase their potential profits or reduce their losses.

While futures can be a great way to diversify your portfolio, it’s important to understand that they are highly volatile and carry high risks. It’s best to only trade a small percentage of your overall portfolio if you decide to go this route.

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