Futures Trading First Steps For Tradestation Traders
Futures trading for Tradestation traders is concerned about trading Futures Contracts. What does a Futures Contract mean? How can Tradestation traders benefit from learning to trade it? A Futures Contract, a cash forward sale, or a "Forward" Contract, is a contract between a buyer who wants to purchase a specific product, and a seller who supplies that same product. It's a forward contract because it must be delivered by a specific date. Futures Contracts are actually formal agreements. That means that each contract obligates the buyer and the seller; neither may default. Trading Futures is characterized as zero sum, every dollar made by the buyer is a dollar lost to the seller and vice versa. When prices are too low or too high, then it is either the buyer or the seller that profits, and the one that profits does so at the expense of the other. Let's see an example. Say oats prices rise, the farmer benefits but the oatmeal manufacturer suffers. If oats prices fall, the farmer suffers, but the oatmeal manufacturer's bottom line goes higher.
Futures trading takes place in two different ways. Commodities are traded at a Futures exchange, on the floor like at the Chicago Mercantile Exchange (CME), where there are open outcry pits. But Futures trading can also be done "electronically," with an internet connection, where individual investors place their buy and sell orders straight from their desktop trading platforms, like Tradestation.
There are 2 types of Futures traders: hedgers and speculators. A trader who is a hedger would be a farmer, manufacturer, importer, or exporter. Hedgers create futures positions for the purpose of reducing the risk that the price of their commodity may fall. For example, a soy farmer knows his crop will be harvested in August. He negotiates a soy futures contract before the harvest at the current price in July for delivery in September, after the harvest. In July, the price of soy is high because of limited supply. Should the price of soy fall in September (when the contract comes due), because of a bumper crop, the farmers' price is already protected. Of coarse, the farmer is taking a risk. Should there be no bumper crop in September, the price of soy would rise even further but the farmer is already be obligated to deliver soy at the price negotiated in July. He would lose the additional profit. In September there could be a bumper crop and the price of soy is lower than his July price. In this case he wins.
Speculators want to be trading Futures to earn a profit, not to protect the price of their commodity. Speculators actually embody the majority of traders in almost all markets. Speculators are able to assume risk. They hope that if they buy low, they can sell high by going long. Oppositely, speculators can sell high and later buy back low, going short. As an example, say the pork belly speculator knows that there has been a virus and pork bellies will be limited in September. The speculator is happy to buy the pork bellies Futures contracts in May at the current price. He is betting that the price of pork bellies will skyrocket and he will make a fortune in September after the small roundup. Speculators give the Futures Market liquidity that is needed. Without speculators, no one would accept the other half of the hedger's contracts. As in the example above, the farmer sells the pork bellies to the speculator in May for the current price. The speculator assumes risk, hoping that by September, the delivery date, the price of pork bellies has risen back up and he can make a profit at the farmer's expense. What he really doesn't want to happen is that in September, the price of pork bellies goes down, meaning that he paid far too much, and he is the loser.
Before there were organized Futures exchanges like the Chicago Mercantile Exchange (CME), Futures trading was much more risky. Contracts were written between one farmer and one speculator. The contracts were signed wherever the farmer happened to be selling his produce, like in farmers markets. There were many problems with individual contracts. First of all, either the farmer or the speculator could default on the contract. Who would ensure payment? If the speculator was going to lose his shirt, he would not pay for the contract. If the farmer saw that the price of soy had skyrocketed, he would default and sell the soy on the open market. Moreover, as contracts were between individuals, the speculator was not allowed to sell his contract to any other speculator because the contract was specifically created for that one speculator. Another problem was, who would certify the quality of the delivery? Farmers could fulfill their end of the contract with lower grade soy. What could the speculator do about it.
Since the start of organized exchanges, it became the job of the exchange to validate quality, payment and delivery. Exchanges regulated that now good-faith money was required with a third party to make sure of contract performance. This reduces the number of contract defaults. Exchanges were finally able to standardize contracts, stipulating the terms of each contract, like commodity delivery dates and product grades.
Organized exchanges have taken Futures trading far beyond buying and selling of just commodity contracts like corn, wheat, rice, soy or pork bellies. Today, there are futures contracts for several different asset classes, including energies, treasuries, currencies and equities. Futures belong to an asset class called "derivatives," securities whose prices are derived from one or more underlying assets. As an example, the S&P 500 Futures Contract underlying asset is the New York Stock Exchange's (NYSE) S&P 500 Index. The S&P 500 Index is one of the most intensely watched equity indexes around the world. The index represents the top 500 well recognized stocks that are now traded on the NYSE. Here is the difficulty with the S&P index, however...you cannot trade the Index. The CME devised the S&P 500 Futures Contract that you are able to trade. As with the case of the S&P 500 Futures Contract, when the value of the S&P 500 Index inflates, the S&P 500 Futures Contract inflates with it, and vice versa.
Now, Futures can also have a currency index as its underlying asset. For individual investors, the Currency Futures Market is designed for the small number of contracts that individual investors intend to trade. With Currency Futures, individual investors can trade the exact same currencies that are being traded in the Forex market, but trade on the CME.
Shadowtraders specializes in training individual investors in Trading Futures. Most other Futures education companies are limited to training only the S&P 500 Futures Contract, and specifically the Emini, earmarked to individual traders. Shadowtraders is far more interested in introducing its clients to a variety of different Futures, including energies, currencies, treasuries, etc. We trade assets with liquidity and volatility. We know the days of the week that a particular Futures contract trades, the times of day it trades best, how many contracts are traded for that, whether or not you can it at all, etc. That is Shadowtraders specialty.
If you are a Futures trader and experiencing losses, if you are stuck trading just the S&P 500 Emini and you want to expand your horizons, or if you are new to Futures trading and want to get more information, attend Shadowtraders Webinars held on Monday nights.
Article Source: FxTradingStock.com
About the Author
Barbara Cohen has been a professional day trader for over 10 years and is the CIO of Shadowtraders. She has trained hundreds of students to trade the Futures Market with Shadowtraders trading software. Before you purchase any trading software, make sure you attend Shadowtraders Monday Night Webinar, and hosted by Barbara Cohen
by: Barbara Cohen
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Date: Mon, 12 Apr 2010
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