Making Investments in Futures and Options

Individuals who are thinking of making investments in futures and options have to learn some important concepts as these entails a series of trading positions. They will have to make consecutive trading moves one after the other as trading futures or trading options involve expiration dates. Traders need to close their positions at it expires and they also have to open new ones that they can hold for a longer time. Traders do not actually trade the physical products or underlying assets per se but they make use of financial instruments such as contracts that stipulate details of the agreements.

The underlying securities or assets are traded at a premium. Traders do not have to put up the entire value of the asset but they only have to pay for it at a fraction of the set price. The value of the premium decreases over time especially when it is near its expiration. Traders may have the chance to make use of leverage but they also have to take the risks that go with it because of market volatility. This may come in the form of the differences between the prices of the underlying assets over a specified time frame.

Individuals may succeed in their futures and options investments if they can manage their financial resources properly and if they can stick to their strategies in minimizing the degree of risk that they are taking. Traders for example may keep their losses at less than 2% of their total diversified investments. Their ability to control their money and their investments despite the volatility of the market will help them become more confident in their trading. Trading futures and options may not be that easy because of the premium that traders have to pay for coupled with the market price of the assets. Beginners may start with mini-contracts first especially when they are still learning how to control the risks involved in trading.

New traders will also have to follow the trend whether the market moves up or down. They also have to know how they can go about hedge trading if they would like to purchase or sell of a put option or a call option. Aside from these concepts, starters need to be familiar with the terms used in analyzing the market. They need to apply concepts such as statistical probability which will help them determine whether they are going to deal with bull market moves or with bear market moves.

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Common Terminology in Futures and Commodities Trading

While at a coffee shop with friends, one turns to you and says, “I just went LONG in Lean Hogs off a confirmed swing bottom.” What did he say? He went “LONG” in a hog off a swing in the bottom?”

For those of us who trade, we instantly know what was just said. By going “LONG”, this person BOUGHT (or is a BUYER) in the Lean Hogs futures market. His decision to do so was based on his determining that Lean Hogs had made a bottom and was now moving higher, thus ‘confirming’ the bottom.

The term LONG is very common in trading circles. It simply means that you took the BUY SIDE of the trade (every trade has two sides, the one who SELLS and the one who BUYS). You believe the market is going to go UP, so you decide to BUY, thus going LONG.

The term SHORT is the opposite of LONG. When you go SHORT, you are a SELLER in the market. In trading Futures and Commodities, you can just as easily SELL first to open the position SHORT, in hopes the market is going to go down. Later, you can then close your position with a BUY.

When you BUY to enter a position, you are LONG. But when you BUY to exit a position, because you SOLD first (went SHORT), you are simply out of your position.

When you SELL to enter a position, you are SHORT. But when you SELL to exit a position, because you BOUGHT first (went LONG), you are simply out of your position.

When you are out of all your positions, you are considered FLAT.

MARGIN is a term used in reference to the amount of money you have available in your trading account that can be used for trading. Brokers require that you have a certain amount of capital available for each contract you trade, in the event that the trade does not go in your favor. A MAINTENANCE MARGIN is the minimum margin you must have in your account for each futures contract you enter into.

BULL MARKET refers to a period when prices are rising. A BEAR MARKET refers to a period when prices are declining.

COMMISSIONS are the fees you pay to the broker for executing your trades.

HEDGING is the practice of offsetting your risk in the actual commodity by taking an equal but opposite position in the futures market. For example, a Farmer who grows Wheat has inherent risks to his crop. By the time he goes to market, prices could have dropped. To protect himself, he can take a SHORT position in the Wheat futures. If the price of Wheat drops by the time he goes to sell his crop, he losses in the actual crop, but he gains in the SHORT futures position, thus offsetting his losses. If the price of Wheat instead moves higher, he gains in the higher prices he is able to sell his Wheat for, but losses in his SHORT futures, again offsetting each other.

DELIVERY refers to the transfer of the actual commodity from the seller of a futures contract to the buyer of the futures contract. Most traders do not take delivery, but will close out their position by FIRST NOTICE DAY.

FIRST NOTICE DAY refers to the first day that a notice of intent to deliver a commodity can be made by a clearinghouse to a buyer of a futures contract.

These are some of the terms you can expect to hear among traders of Futures. There are a few others, less used. And if you trade Options on Futures, you have a whole set of terms such as PUT, CALL, In-the-Money, Out-of-the-Money, etc.

Before engaging in futures trading, take the time to learn the language. This way, there will be no mistakes in communication between you and your broker, and it helps when sitting around with traders at the coffee shop.

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Futures and Commodities – Invest For Your Future

To make money with futures and commodities you need to understand how both of these work. There are many people that have made great fortunes speculating with these types of investments. many people say that commodities could be one of the most profitable things you can invest in the next five or so years. It is important that you find a great broker that can help you in choosing the right commodities to invest in. Commodities are basic products that people use each and every daysuch as rice, corn and grain are good examples. The price of these goods fluctuates from day to day and buying and selling these commodities can make you money.

Basically what happens is you have a futures contract so that you can buy and sell the commodity you want to. It is not feasible for you to actually take possession of the product that you are purchasing so they have a futures contract to expedite the sale.the futures contracts are very similar to trading stocks except for they have an expiration date and the delivery date. Once you learn how these markets were again be easy for you to make a sizable profit. It is important that you get as much information as you can before you begin so that you can be as successful as possible.

Remember that trading commodities and futures is a great way for you to make money. But as with most markets you need to have the knowledge it takes to be successful before you begin. It is a good idea to search and find out exactly how these markets work before you spend any of your own money. Also having a broker that can help you understand the terminology is very helpful. After you your feet wet in this market you can see there are great opportunities for you to make a lot of money.

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Understanding Technical Analysis of Stocks, Futures and Commodities

Understanding Technical Analysis of stocks, futures and commodities can be a valuable tool in determining the trend of any market and assisting with entry and exit levels for your trades.

The goal of technical analysis in the stock, futures or commodities market is to help us determine when a market is trending, and when it is not. If a stock or futures contract we want to trade is trending, then we want to be on board. If it’s not, all you are going to do is lose money as you get whipsawed around day after day. This is not what we want as traders

If you trade using a weekly chart, all it takes is a couple of trends a year to make a lot of money trading. If you trade something like that S&P Emini futures contract, using a 3 minute chart, then you’ll need one or two of these strong trends a day to do well, but it’s all relative.

Unfortunately, many people fight the trend and buy at every small up tick in a down-trending market, thinking they have picked the bottom, only to see the Stock or index fall further immediately. By the time the sellers are finished, these traders have spent their monetary and psychological capital in a futile attempt to pick the bottom of the market.

Another common mistake traders often make is buying more as the price falls, or averaging a loss. You can imagine how dangerous this strategy can be in a strongly down-trending stock – it’s something good traders never do. The trend is your friend, don’t ever buck it.

Good technical analysis skills, especially in fast moving futures and commodities markets, give us a mechanical indicator for price points to use for entries and exits and take a lot of the guess work out of our trading. It is very hard to argue that the trend is anything but down at any time if you are simply looking at a series of consistent lower tops and bottoms on your chart.

Does good technical analysis mean you’ll always make money?

No, of course not. Losses on some trades are inevitable, as we cannot know for sure what the market will do. It only takes one person somewhere in the world to invalidate your perfect trade set-up and send the price of any market in the opposite direction to what you were certain was going to happen.

All our analysis can do is alert us to probabilities – there are no certainties in financial markets. This is the hardest thing for most traders to accept. We all hate to be ‘wrong’, but that is the nature of the trading business.

All we can do is take every trade and see what happens. The better our analysis and our trading system, the more likely our trades will produce profits.

Every one of us must learn or develop a system of analysis that we are comfortable with, based on what we learn from other traders, mentors and coaches, and then we must take every trade that system signals.

If we start to second guess our system, we may as well throw it away and just stick with our day job.

Make a decision to develop or learn a technical analysis system you are happy with, and commit to taking 20 trade set-ups in your preferred stock, futures market or commodity no matter what.

Then follow your trading rules to the letter. This will give you an objective measure of how profitable your system is and whether it is right for you.

If you can enter a trade and hold a position, your plan is sound. If not, you may be over-trading (have too many open positions for your account balance and your personal temperament) and need to reduce the size of your position or adjust your plan is some other way.

The large profits come from using a proven technical analysis method to identify a strongly trending market and taking multiple positions with that trend.

This naturally involves holding firm and not jumping out at the first sign of trouble. Of course, you can only take what the market is prepared to give, so a system of trailing stops is a good way to lock in profits as they accrue.

Bottom Line: Find a trading and analysis system that’s been proven to work from somebody who has been actually trading it for a long period of time, have that person coach you through their system until you can implement it flawlessly, then take every trade signal the system produces regardless so you can test it’s validity.

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How to Make Money in Futures and Commodities

Futures trading can turn into an utter failure or a ravishing success depending on how you go about it. There are some things that a person should keep in mind before embarking upon the risky business of trading in futures:

1)Prices are set by the forces of demand and supply. Futures markets are nothing but the clearing place for this demand and supply data. Originally they were created as a way for farmers to get some price stability and hedge against fluxuations. These are people who actually had or wanted the goods. You don’t, so keep that in mind!

2)Commodities are from things like petroleum products to agricultural goods. Futures are on things like currencies. Trading in these things can be tricky since these markets can be unpredictable to those who do not live in that world. Even then, the big guys use these mainly to get some price predictability, not as short term investments – unless they see what they think is an obvious move. You won’t know those!

3)Due to the instability of these markets, it is better to have a futures trading system to deal with the risk element. In any type of investing you should have a system based on principals, history, and behavioral beliefs. Unless you are an oracle, you’ll be dangling in the wind without a system. Below I have a simple system that historically wins more than it looses.Futures trading systems can help you in earning a lot of money in the futures market and also reduce the time that you spend in investigating the market trends. Although futures trading is laden with its own risks, using a trading systems and sticking to it statistically increases your ability to make money. A futures and commodity system can ensure that you enter and exit from the market at the right time while limiting your losses. It provides you with indicators calculated using certain mathematical formulas about the flow of the market and many of them can be quite complicated. Not mine.

So what’s my suggestion? Unless you are going to make it your life, you won’t be able to keep up with the many influences on the market. So here is my simple system that I have learned.

A. Test your system by paper trading. This means you mark down a real purchase price and a real sell price. Do this for at least a month or 10 trades, whichever es first.

B. Resistance trade. Look for historic highs and lowes on commodities and look for them to break out of that pattern. Usually when a commodity breakes out, it will make what’s called a 1 2 3 pattern. Say that oil drops to $10 which is a historic low. Normally it will come back up and make a rally attempt. Usually this rally will be tested. If it breaks out of that point it will usually continue in that direction until it gets close to 50% of the change. As an example, lets say Oil started to go up and hit $12. Usually it will maybe drop a bit, and then if it broke past that $12 mark it would continue to rise until it hit about 50% of where the drop started from. That’s it! Give it a shot – ON PAPER FIRST! If it works for you, go with it!

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