Futures Trading 
An Introduction To The World Of Future Trading
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Futures Trading  - Arbitrage

For those of you who have never come across arbitrage before, it is not a strategy that you can adopt as a novice trader, as it requires skill, access to several different markets simultaneously and some serious amounts of money - a bit like futures trading! Typically it tends to be used by professional traders and the success depends on very small price differences between markets in different parts of the world. To give you a very simple example in my own case I used to arbitrage between online bookmakers placing risk free bets on the same sports event. It's hard work and you have to be quick, as everyone else is looking for the same opportunities.

Futures Trading - Arbitrage and Futures Prices

Now having said that the futures market is a 'pure' market, where supply and demand dictate the futures contract prices, there is also another factor at work which pulls prices back into line and further refines the process of price discovery. That effect is arbitrage. There are many full time traders around the world who simply look for these opportunities to appear in different markets. In essence they are looking for tiny differences in the prices being quoted in one market as opposed to another, and then buy and sell simultaneously having constructed a risk free trade - let me give you an example with gold. Suppose gold is trading in the US at $920 an ounce and in London at $922, then the trader will buy in the US market and sell in London at the same time, creating a profit of $2 an ounce. Significant opportunities in the forex market can also be found in Swiss Francs, the Japanese Yen and the Euro.

Now you might wonder what this has to do with futures trading prices - the answer is simply this - that the arbitragers are another reason that futures prices remain in balance with the market. When arbitragers spot a price difference the heavy selling or buying pressure help to drive the prices closer together keeping the markets in balance.

In real life these opportunities may only last for a few seconds or minutes, but the pressures they create help to keep the futures market liquid and in balance with the supply demand curve of price discovery. It is one of the ironies of life, that Nick Leeson originally started his trading career as filling arbitrage orders between Tokyo and Singapore on the futures markets, making small amounts on each trade ( a few thousand dollars ) but with no risk. He then moved on to bigger things!

OK- I think we covered most of the basics of futures trading so perhaps we should look at some of the order types you can enter, and some simple trading strategies.

Futures trading -  next page


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