Before we get into it completely, let me tell you what types of trading, there are many.
It seems obvious, but I remind you because it is very important that you are aware of the capital that you can risk, as well as the type of system or systems that best suit you.
And after this little warningLet’s go there!
1. What is futures trading or futures on the stock market?
Summing up a lot, futures are standardized financial contracts that can be traded on the stock exchange.
By trading futures you can trade futures on currencies, stocks, metals, indices, commodities and even cryptocurrencies.
2. A bit of history about futures trading
Actually, we cannot say that futures trading is a fad, a posturing of the current market, but to find out its origin, we can go back to the 19th century and relate it directly to farmers’ crops.
What, Ruben?
This type of trading was based on private contracts in which the buyer and seller (farmer) set the sale price at a certain date.
In this way, the farmer guaranteed a price for part of his harvest depending on what happened and the buyer assumed a drop in demand or a weather event or on the other hand, quite the opposite: an increase in demand and that the price was higher.
In other words, futures trading was born from the idea of an agreement between parties that was assumed 100% by both the buyer and the seller and with which everyone benefited.
3. Advantages of futures trading
These are the most interesting points when trading futures:
1- Leverage.
More accessible to retail trading. This is great if you have little capital, because this is not an impediment when it comes to being able to multiply its value.
We can have different leverages of the same asset, that is, we can operate large, mini and micro futures since May 2022. This diversity allows many people to operate a micro future with little capital and make futures with all the characteristics.
In this way, access to trade futures is becoming more available and this new reality of mini contracts is that the entry cost to trade those regulated products has dropped a lot.
Therefore, it is a type of trading that can be easily adapted to both your financial capacity and your personal situation on a day-to-day basis.
two- It is cheaper to do operations with shares.
In this case, we simply need a percentage of the total of the operation.
3- Provides greater benefits if the operation is correct
4- Futures investors make more money and faster than spot investors
Since the movements are more abrupt.
5- we can make money Whether the price goes up or down
Since we can enter long (buy) and short (sell) positions. Thus, we can take advantage of the current adverse reality where the stock markets plummet from one day to the next and we can earn a lot of money.
6- This type of trading allows us set at the beginning of our operations what the loss is maximum using a stop loss.
7-The futures market It is a regulated and centralized financial instrument
This means greater transparency and legality than any other financial asset. It is a market that has a regulator that oversees the good governance of that market. The graph that you see in your operations really corresponds to the purchases and sales that have been executed and in the event of a conflict, you will always be looked after as trader.
8- It is a very liquid market
We will always find a buyer or seller who accepts our position, so there is hardly any counterparty risk.
9- Allows to make coverages
In trading a hedge It consists of opening a position in the opposite direction to the one we want to cover.
Futures Trading Disadvantages
On the other hand, these are the not so good points that has this type of trading in my opinion:
1- A futures contract is unique and indivisible
therefore, the assets cannot be divided and this offers less operating margin. But, minis and micros of almost all futures continue to emerge that allow us to operate with less leverage. Also now the micro contracts.
two- Have expiration date
So it cannot be extended in time.
2- The biggest disadvantage of all is knowing how to manage leverage
Because we have to be aware that we can multiply the losses in case of losing trades. That is why it is so important to use stop loss.
In short, keep in mind that futures have to be used with great prudence and knowledge.
4. How to trade Futures
1- Always have a system or strategy.
Really, this advice is essential and applicable to any type of trading in which you want to venture.
You already know that in previous posts, I have always advised you to analyze your strategy well and not be in a hurry to execute your operation. Plan your trades carefully before jumping headlong into the market.
2- Protect your positions.
Really think of you stop loss Y drawdown forever.
My advice is that you always consider that you can lose, so that you maneuver an early exit plan in case movements against you actually happen.
Well it is true that stop loss They are not a guarantee of benefits, but it is true that having a well-defined one can save you from more than one and help you keep your losses at a manageable level.
two- Step by step.
Don’t ever, ever be too rash, suddenly flashing your 7 futures contracts and risking all the capital you have.
Please keep calm and avoid cheap demagogy.
You can start little by little and manage to develop a solid and easily manipulated strategy in the search for greater horizons. With one or two contracts to start is very good.
3- Slowly but surely.
Although it is true, as I am constantly telling you, that it is very important to keep a cool head as much as possible in the world of trading and not get carried away too much by the world of emotions, you must not rest on your laurels either.
Without wishing to sound counterintuitive, don’t be afraid to try and err, test and err and, of course, open short positions that can inadvertently help you achieve good trading opportunities. Trading opportunities present themselves in both rising and falling markets.
4- Patience, always.
This advice seems very obvious, but believe me, it is not.
When we blind ourselves to the success of our operations, talking about both futures trading and other types of trading, we inadvertently fall into the absurd hypocrisy of “I know I shouldn’t, but I’m going to smile broadly at the market.” And MEC, blunder.
Don’t try to get into every move in the market; I tell you this mainly for 2 fundamental reasons: the 1st of them is that you can go crazy and the 2nd is that you can get into a whirlwind of comings and goings in the market that will not benefit you at all.
Arm yourself with courage, but above all with patience and wait for the right moment to take a bite out of the bag.
5. Finally: What is the difference between CFDs and futures?
A priori, when we talk about CFDS and futures, it seems that we mean the same thing, but nothing is further from the truth.
A CFD is a financial instrument through which you speculate on the difference in its price between the opening of the contract and its closing.
A future, as I have already told you before, is a standardized financial contract that can be traded on the stock market.
The future can be hedged or speculativethat is to say, in hedge futures trading we want good and in speculative trading, we don’t, and we simply want to limit ourselves to operating.
It is organized in an organized market (forgive the redundancy). At the signing of the contract it is not necessary to have the money or the property, but on the exchange date it is.
On the other hand, the CFD, like the future, allows leverage but does not expire, that is, it can be extended indefinitely. Also the CFD is organized in an unorganized market, so if I have problems with the broker, Houston… And lastly, trading CFDS there is no exchange of goods as such.
The main differences between one trading system and another is that the CFDS market is not regulated and that the futures market can be used as a hedge to obtain the good, while the CFDS market cannot.
And here everything related to futures in today’s article.
As always, thanks for coming this far.
We read soon.