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198Friend Pages</u></a> 199 </p> 200 201 202 </div> 203 204 </div> 205 206 </div> 207 208 </div> 209 210 </div> 211 212 </div> 213 214 </div> 215 216 </div> 217 218 219<div class="right fleft"> 220 <!-- content --> 221 222<div class="content"> 223 224<div class="box"> 225 226<div class="tl"> 227 228<div class="tr"> 229 230<div class="br"> 231 232<div class="bl"> 233 234<div class="title">About Futures Trading</div> 235 236 237<div class="text"> 238 239<h5>What is Futures Trading?</h5> 240 241 242<p>To understand the futures market, it helps to know why it was 243created. When food preservation, storage, and distribution were not 244what they are today, farmers and buyers struggled with chaotic price 245swings brought on by the impact of supply and demand. A group of 246businessmen in Chicago organized in 1848 to offer the first "forward 247contracts" guaranteeing farmers a particular price for their grain in 248the future. From these simple origins, the futures market stabilized 249price fluctuations over the natural cycle of growing seasons with its 250surpluses and shortages. This benefited farmers and livestock producers 251as well as consumers. </p> 252 253 254<p>Today, the futures market stabilizes and manages price volatility in 255grain, livestock, and other food products, as well as diverse markets 256including energies, metals, even international currencies and financial 257instruments that can fluctuate in value. Futures are traded by buying 258or selling contracts that guarantee a future price on a commodity. 259Futures contracts are primarily used by those with a business interest 260in a particular market. Individuals may also use the traits of the 261futures market to do speculative trading on the fluctuations of futures 262contract prices. </p> 263 264 265<p>A futures contract is based on the value of a commodity such a 266bushel of corn, an ounce of gold, or a barrel of crude oil. Market 267participants will trade futures contracts to set the prices they wish 268to buy or sell a commodity in the future. For example, a farmer 269planting corn in the spring will sell corn futures at the price he 270wishes to sell his crop by harvest time in the fall. Similarly, a 271transportation company will buy futures at the prices they wish to pay 272for oil and gas throughout the year. Profit and loss in futures trading 273will offset cash transactions for commercial market participants. 274Speculative futures trading is critical to maintain liquidity in the 275market. Without a business interest in the market, a speculator may 276trade on price action either up or down, using fundamental and 277technical analysis to identify trends. </p> 278 279 280<p>Hedgers and speculators alike may open a futures trading account 281with a futures brokerage. The Internet has made it possible for hedgers 282and speculators to research futures brokerages that offer accounts to 283make trades in any commodity markets. The holder of a futures trading 284account may make his own trades or arrange with a broker for 285professional account management.</p> 286 287 288 289<h5>Trading Futures Basics</h5> 290 291 292<p>Money is made or lost trading futures using the conventional "buy 293low, sell high" approach. The primary difference between futures 294trading and trading stocks is that futures can be traded to the 295downside just as easily as trading for upward price movement. Further, 296downward price changes in commodities are not necessarily indicative of 297"gloom and doom." Commodity prices are moved by a range of fundamental 298and technical factors. Traders will follow fundamental and technical 299analysis for placing a speculative position. </p> 300 301 302<p>Speculators trading the price action on commodities will research an 303individual market to study its particular traits. The fundamental 304concept of supply and demand indicates that prices will rise in times 305of commodity scarcity and drop when supplies are plentiful. However, 306this is not guarenteed and past performance is not indicative of future 307results. Agricultural markets including corn, soybeans, wheat, and 308oats, will see volatile price action during planting and growing 309seasons. Weather events will be carefully studied along with USDA 310reports on crop progress and condition. As harvest season begins, 311prices may fluctuate with high volatility until the year's yield is 312known. Prices will usually drop and stabilize as supplies rise. 313However, this is not guarenteed and past performance is not indicative 314of future results. Traders in the financial commodities will also look 315to the market's anticipated response to government reports and 316political events. </p> 317<p>
317Futures traders often combine fundamental analysis with technical 318analysis, using charting strategies such as Fibonacci retracements, 319moving averages, Bollinger bands, pivot points, and support and 320resistance. Major fundamentals such as US government reports and 321serious weather events including flooding or extended draught have the 322power to influence significant market moves. Technical analysis may 323applied to the commodity markets to gauge the strength of trends, 324predict retracements and reversals, and to time position entry and exit 325while fundamentals provide a big picture to macro market moves.</p> 326 327 328 329<h5>Who Trades Futures?</h5> 330 331 332<p>Participants in the futures markets are hedgers and speculators. 333Hedgers have a business interest in managing price risk exposure. 334Speculators seek to profit on the price movement in the market, whether 335it is up or down, and provide necessary liquidity. Commodity markets 336will each have fundamental factors that influence price movement. 337Successful futures trading requires having an understanding of these 338factors combined with a knowledge of technical analysis.</p> 339 340 341<p>The futures market was originally established to help farmers and 342grain merchants manage the price swings imposed by supply and demand 343through the seasonal cycles of planting, growing, and harvest. Today, 344futures market participants trading futures to hedge price risk 345exposure may include any commercial entity that produces or buys any of 346the commodities such as grains and livestock, the "softs" including 347cocoa, sugar, cotton, coffee, and orange juice; energies including 348crude oil, heating oil, gasoline, and natural gas; and metals such 349gold, silver, platinum, and copper. Futures contracts on interest rates 350and currencies allow money managers to hedge risk on the fluctuating 351values of institutional financial holdings.</p> 352 353 354<p>A speculator may trade on price action, going long to profit from 355upward price movement or going short if the market is anticipated to 356drop. Speculators are essential to maintaining market volume, 357volatility, and liquidity. The futures market is open to private 358individuals who meet the financial requirements for opening a trading 359account, and understand the risk associated with futures trading. Money 360used for trading futures must be risk capital and a trader must be 361aware that it is possible to lose more money than the original account.</p> 362 363 364<p>Internet-based electronic trading platforms make it possible for an 365individual to do his own futures trading. An investor may prefer to 366trade with the advice of a professional. A commodity trading advisor 367(CTA) is a professional who makes trades on behalf of investors in what 368is called a managed futures program. Performance of the program will be 369available for the investor to evaluate. The CTA generally receives a 370fee for trading advice and incentive fees when the program is 371profitable. Managed futures programs and the advice of CTAs are 372regulated by the National Futures Association.</p> 373 374 375 376<h5>Futures Exchanges</h5> 377 378 379<p>In 1848, a group of Chicago businessmen set out to calm the chaos of 380grain trading in the Midwest, organizing what would grow into the 381Chicago Board of Trade (CBOT). Left unchecked, price swings were so 382severe farmers would burn their grain as fuel when supplies drove 383prices too low to cover the cost of transporting it to be sold. 384Initially offering basic "forward contracts" to guarantee future prices 385to buyers and sellers, the first futures contracts were introduced by 386the CBOT about two decades later and included formal specifications for 387grain quality, and quantity, and delivery. As futures trading became 388adopted as a standard practice, millions of bushels of grain passed 389through Chicago, establishing the city as a major transportation and 390shipping hub and giving birth to a second futures exchange, the Chicago 391Mercantile Exchange (CME). The needs of dairy merchants in Manhattan 392gave rise to the New York Mercantile Exchange (NYMEX) at the turn of 393the century.</p> 394 395 396<p>The 1960s launched an era of dynamic expansion by the Chicago Board 397of Trade with the introduction of futures trading in livestock, metals, 398and lumber. Futures contracts in currencies, indices, interest rates, 399and energies followed. The 1970s saw the creation of listed options 400when the Chicago Board Options Exchange opened its doors across the 401street from the CBOT. The NYMEX evolved into the primary center for 402futures trading in energies and metals.</p> 403 404 405<p>The new millennium saw a major development in the futures industry 406when the Chicago Board of Trade merged with the Chicago Mercantile to 407form the CME Group. With the addition of the New York Mercantile, the 408newly-formed entity became the world's largest and most expansive 409exchange for futures. The ICE is the newest US exchange for futures 410trading. Established in 2000 to offer an electronic energy market, the 411ICE later acquired the New York Board of Trade to become the primary 412center for trading the softs commodities including coffee, cocoa, 413sugar, and orange juice.</p> 414 415 416 417<h5>What is a futures contract?</h5> 418 419 420<p>A futures contract is appropriately named. It is a contract on what 421you can do in the future. Futures contracts, or simply "futures," were 422created to help producers and buyers of commodities manage their price 423risk over time. A futures contract is a financial instrument on the 424value of a commodity such as corn, crude oil, gold, or coffee. The 425futures contract describes quality and quantity specifications for the 426commodity and guarantees a future price to the holder by a specified 427date. As the value of the commodity fluctuates, the value of the 428contract will change with the holder's ability to make a profit (or 429loss) on the price change.</p> 430 431 432<p>Futures are traded on exchanges similar to stock exchanges. The 433basic trading concept of "buy low, sell high" applies for futures 434trading. Most participants in the futures market have a business 435interest in the commodities they trade but speculators also help to 436maintain liquidity.</p> 437 438 439<p>Let's look at a simple example of how a hedger and a speculator 440might use the futures market. A jewelry designer will need to purchase 441gold to replenish the current supply by the end of the year, several 442months out. He is concerned that the price of gold may rise above his 443company's budget for raw materials. He will do in futures what he plans 444to do in the future: He opens a contract in the market to buy gold 445futures at his target price for the month he plans to make his 446purchase. A speculator follows the value of currencies and sees the US 447dollar index strengthening. A rising US dollar tends to pressure the 448price of gold downward so the speculator sells gold futures to 449potentially profit from downward price movement. </p> 450 451 452<p>As a hedger, the jeweler will ultimately buy gold for cash from an 453industry supplier. If the futures are above the current cash prices at 454the time of his gold purchase, he will make a profit on his futures 455trade, offsetting the higher price he has to pay for gold from his 456supplier. If gold futures are trading below cash prices, he will take a 457loss on the futures trade and average out his costs when he buys actual 458gold for a low cash price. With no business interest in the price, the 459speculator will take a profit or loss purely on the basis of market 460price action against his futures position in gold. The speculator's 461short position would profit if gold futures drop and the speculator 462closes his futures position at a lower price than where he entered the 463trade. He will lose money on the futures trade if gold prices rise. 464Past performance is not indicative of future results, and the risk of 465loss exists in futures trading.</p> 466 467 468 469<h5>Trade Options on Futures</h5> 470 471 472<p>The Chicago Board Options Exchange introduced options on futures in 4731982. Options provide a futures trader with unique strategies for 474managing the risk of a futures position. Options can be used in 475combinations called "spreads" to establish a position in the market 476with the potential to profit across a range of futures prices.</p> 477 478 479<p>Like futures, options are in the class of financial instruments 480called derivatives. They derive their value from the value of an 481underlying asset or another financial instrument including futures 482contracts. </p> 483 484 485<p>The value of an option will fluctuate with the value of the 486underlying futures contract, allowing options to be bought and sold on 487an exchange and traded in the same manner as futures. Option contract 488terms will extend a right or require an obligation with respect to the 489future value of the futures contract. </p> 490 491 492<p>The buyer of an option will acquire the right to be long or short a 493futures position at a particular price called the strike price, by a 494specific date which is the expiration date. There are two types of 495options. A call is an option on a long futures position. A put is an 496option on a short futures position. If the strike price of the option 497becomes profitable relative to the underlying futures price by the 498expiration date, the option holder may exercise the option, meaning he 499may assume the futures position, long if he held a call option or short 500if he traded a put option.</p> 501 502 503<p>The price quote for an option is called the premium. The buyer of an 504option pays the premium to open a position. The option buyer's maximum 505potential risk on the trade is the amount of premium paid plus 506transaction costs. An option seller collects the premium amount and it 507is credited to his options trading account (minus transaction costs). 508The option seller is paid upfront to assume the potential risk of the 509position. If an option buyer's position becomes profitable and he is 510able to exercise his option, the option seller will be required to take 511the opposite position which will be a loss at the time it is opened. 512The potential for loss to the option seller may be unlimited. The 513option seller profits on a trade if the option does not reach the 514strike price and the buyer is unable to exercise the option. If the 515option trade is not profitable to the buyer, the option seller will 516retain the amount of premium he collected (less transaction costs) when 517he opened the trade.</p> 518 519 520 521<p><strong>Disclaimer: Trading in futures and options involves a 522substantial degree of a risk of loss and is not suitable for all 523investors. Past performance is not indicative of future results.</strong></p> 524 525 526 </div> 527 528 </div> 529 530 </div> 531 532 </div> 533 534 </div> 535 536 </div> 537 538 539 </div> 540 541 </div> 542 543 544<div class="clear"></div> 545 546 </div> 547
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