Futures Trading - Home
Hi - and a very warm welcome to another of my trading and investing sites which I hope will help you give you a sound introduction to futures trading. My name is Anna and having been involved in trading and investing for over fifteen years, I now trade currency full time for a living.
The purpose of this site will be ( I hope ) to give you a very good grounding in the basics of futures as a trading instrument, the markets, the risks and the opportunities. I am also developing several other sites based on individual sectors within the futures market such as commodity futures, currency futures, index futures and many others, but whilst these markets may differ in their trading sector, the underlying principles of futures and how they work remain the same. So if you like, this is a primer, a framework if you like, to help you understand the basic mechanics of futures trading, which can then be applied to the other more diverse markets.
My purpose is to help you learn how the futures market work, who uses futures, and which strategies will make you a more successful trader. Now as someone who has traded futures in the past, this form of trading is not for the risk averse, or the novice. These are technical instruments which are extremely liquid, risky and complex, but like options, with a little bit of study and by breaking it down into component forms, I hope all will become clear. They are certainly worth the effort and whilst much of futures trading is speculative, there are many ways to use them to hedge other trades or positions.
OK - so let's get started looking in detail at futures trading.
Futures Trading - An Introduction
Futures
trading can trace it's history back to farming and agriculture and in
particular to the grain and cattle markets of the mid-west around Chicago, where even today
many of the largest futures exchanges
are still based. In the early 1800's, farmers simply grew their crops and
raised their cattle, then brought them to market to try to achieve the best
prices. Gluts and shortages caused huge swings in prices which in turn
affected others in the supply chain who were purchasing these products for
onward supply. In addition there was no guarantee that once the
products were delivered to the market, that they would actually sell, which
in turn led to crops being dumped in the streets and left to rot.
In order to overcome these problems a centralised market was established which allowed merchants, processors and agricultural companies to trade in various types of 'contracts', to smooth out prices and to insulate them from the risk of adverse price movements in the future. Initially there were two types of forward contracts known as a "to arrive" contract or a "cash forward" contract, but of course many of these contracts were never honoured, as there was no enforcement process in place. Buyers often changed their minds at the last minute, particularly if there had been a decline in prices, and equally sellers reneged if prices had increased. To make matters worse there was no market where these contracts could be traded easily, and so in 1848, the Chicago Board of Trade was established as a central exchange, to provide both a regulated market, and also one where buyers and sellers could be brought together. This was followed shortly afterwards in 1874 by the Chicago Produce Exchange which subsequently became the Chicago Mercantile Exchange in 1898.
The first contract in corn was written on March 13th 1851, and in 1865 standardized futures contracts, based on the original forward contracts, were introduced. The futures market had been established! Today we can trade in a diverse range of markets from currencies and financial instruments such as treasury bonds and securities, to raw commodities and agricultural staples, such as wheat and livestock.
Now, in our futures trading, do we need grain silos in case we have to take physical delivery of our contracts - the answer of course is no ( fortunately ) , otherwise the banks and brokerages would look more like farming communities than financial institutions, with livestock running wild ! ( it might make then nicer places, but I digress). However, as we will see in a minute, if you don't close out your positions correctly, you will have to take physical delivery of the underlying contract - so if you don't want 40,000 pounds of live cattle futures in your living room, then I suggest you read carefully!
OK, I hope the above bit of history has given you a little of the flavour, but also helps to explain what a futures contract is, and why so many of the major exchanges that we use today are based in Chicago. Let's start with a what a futures contract is and how we use it in our futures trading.
