When it comes to trading futures contracts, there are a few things that you need to keep in mind. First and foremost, futures contracts are traded on exchanges, which means a centralised location where all of the trading occurs. The exchange is responsible for setting the contracts’ prices and clearing all trades.
The main benefits of trading futures contracts
One of the main benefits of trading futures contracts is that they offer high liquidity, which means that you can easily buy or sell a contract without worrying about finding a counterparty. There are also various contract types that you can trade, which gives you plenty of flexibility when it comes to your trading strategy.
Another benefit of trading futures contracts is that they offer high leverage. Leverage is the ability to control a large amount of capital with a small amount of money, which means that you can make a lot of money with a small investment. However, it also means you can lose a lot of money if the market moves against you.
Lastly, futures contracts are regulated by the government, which means that there are rules in place to protect both buyers and sellers. For example, a minimum margin requirement is the amount of money you must have in your account to trade a contract. There is a set limit on how much price movement can occur in a day. These rules help reduce the amount of risk involved in trading futures contracts.
What traders need to know before trading futures contracts
Now that you know the basics of futures contracts, there are a few things that you need to know before you start trading.
Find a broker and open a margin account
First and foremost, you need to find a broker who offers futures contracts. Not all brokers do, so it’s essential to check first. You also need to open a margin account with your broke because futures contracts are traded on margin. Margin trading means that you only have to put down a small percentage of the contract’s total value to trade it.
Decide which type of futures contract you want to trade
Once you have found a broker and opened a margin account, you need to choose the type of contract you want to trade. There are various contract types, each with its benefits and risks.
For example, some contracts are more heavily traded than others, which means that there is usually more liquidity, making it easier to buy or sell a contract when you want to. However, it also means that the prices of these contracts can be more volatile.
Another crucial thing to remember is the expiration date of the contract. Most futures contracts expire within a few months, and you need to be aware of when the contract expires and make sure that you close your position before then. If you don’t, you may be required to take delivery of the underlying commodity, which could be very costly.
Risks of day trading futures contracts
You need to be fully aware of a few risks before starting day trading futures contracts. First and foremost, futures contracts are a leveraged product, which means that you can lose a lot of money if the market moves against you. It’s essential to limit your losses by using risk management techniques, such as stop-loss orders.
Another risk is that futures contracts are traded on margin, which means that you only have to put down a tiny percentage of the contract’s total value to trade it. However, it also means that you can be required to make additional margin payments if the contract price goes against you. These payments can add up quickly, putting your account at risk of being closed if you can’t make them.
Day trading futures contracts can be a great way to make money. Beginner traders should use a reputable and experienced online broker before investing in a futures contract.