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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>
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