Understanding Futures Trading–Predicting the Economic Future

March 25, 2009 by  
Filed under Futures Trading

Futures trading is basically a type of investment which involves speculating on the price of a specific commodity going up or down in the future. An investor can make huge profits or huge losses in this type of trading. The bottom line is that futures trading is an advanced form of investment, and it requires indepth knowledge. Although one can easily learn the proper strategies with sufficient education, futures trading is not something to dive into without enough knowledge.

Despite being significantly tricky and risky, futures trading actually works on a simple concept. What happens is not trading of an actual commodity, instead the buyer and seller are speculating that the price will move to their favor. Futures trading success revolves around sound judgment and informed choices rather than odds and luck, although these can also come in to play. Anyone with a good sense and instinct for processing and interpreting economic factors can definitely make good profit out of futures trading.

A simplified example of futures trading can happen in the metal ore industry. Let’s say a miner can come up with a significant amount of copper in half a year. He hears on the radio that a new technology has been developed that can replace copper as a raw material for a product. This will definitely hint at him that in the future the price of copper can significantly drop. Therefore, he needs to produce as much copper as he can in the shortest possible time. Or, he can “sell” his future load of copper for a price higher than the estimated price at the end of six months so that he’ll have the profit he would have got if the price won’t go down. Looking at this, the miner’s future trading is used to avert a loss. Of course he is still gambling because the technology might not catch up, or worse, the price of copper would instead go up.

The same scenario of futures trading can be applied to buying futures. A telecommunications company might anticipate an increased demand or shortage of supply of copper and decide to buy surplus stockpile for future use. The problem, commonly, is that no supplier can supply the estimated quantity needed and therefore some time is needed for the supplier’s stocks to increase. This can push the telecommunications company to do some futures trading and buy this future stock at a price lower than the anticipated increased price in time. This can cut losses that will be otherwise faced during the increase of price. But still, if the price would actually go down instead of up, the telecommunications company loses big time.

However, futures trading in reality doesn’t work in such a simplistic manner. Many economic factors and parameters need to be factored in order to get the most likely future scenario. There are also systems and guidelines in place to regulate and control futures trading.

The simplest way to get into futures trading is to go to online futures trading sites to gain all the tools and knowledge to make profit out of trading futures.

    a