Henry Ford said, “Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services”. When this power of speculation is applied to the prices of various kinds of commodities, then it is known as futures trading.
Thus, the term futures trading is all about working out the likely price of a commodity in the future. In this case, the term commodities can encompass the following:
- Precious metals,
- Raw materials for clothes,
- Edible items and food products,
- Food grains of various kinds and even
- Currency, among many other things.
There is no doubt that futures trading holds the promise of extremely big financial returns for an investor. However, it is important to know how to get into futures trading and come up with a robust strategy.
This is one of the strategies that is used by speculators as far as futures trading is concerned. It simply means that a trader believes that the price of a particular commodity will rise in the future.
Therefore, he sets a particular price today and enters into a contract to buy the commodity at this particular price in the future as well. Thus, a futures contract is purchased today by a speculator in order to gain massively when the price increases in the future.
As with anything else in the financial market, this strategy may also bring about a loss to the speculator if the price falls rather than prices. Such a scenario may also see the speculator losing out even the initial margin deposit that he makes.
At the opposite end of the spectrum from the above strategy, lies the strategy known as going short. Here, a speculator believes that the price will increase in the future. He then goes on to sell or agreeing to sell a futures contract rather than buying the same.
By completing the sale of a futures contract at a higher price, a speculator stands to gain from the transaction. Here too, a speculator can lose out on a sizeable amount of money if the prices increase rather than decrease. A declining market suits a speculator who is going short.
This strategy perhaps lies in the middle of going long and going short. It is said to be a rather careful way of approaching futures trading. Basically, it takes care of futures contracts by calculating the price differences between the 2 contracts pertaining to one commodity.
A speculator can indulge in this strategy by looking at:
- Different delivery dates, also known as calendar spread.
- Trading in different futures exchanges, also known as inter-exchange spread.
- Mixing or choosing between going long and going short in the same month, also known as inter-market spread.
At the heart of every strategy as far as futures trading is concerned, lies a lot of intensive research. It is only information, and the right kind of analysis that can help a speculator enjoy a huge degree of success as far as the complex scenario of futures trading is concerned.
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