The primary purpose of futures markets is to provide an efficient and effective mechanism for the management of price risks. By buying or selling futures contracts that establish a price now for a purchase or sale that will take place at a later time, individuals and businesses are able to achieve what amounts to insurance protection against adverse price changes.
When trading futures, the major things to consider are:
- The asset - The quality of the product or the asset must be specified.
- Contract size - The amount of the asset delivered under one contract.
- Delivery arrangements - The seller will choose the exact date when the asset will be delivered.
- Price quotes - The way that the futures prices are quoted needs to be specified. Some futures are quoted as dollars and 32c of a dollar. This will also define the minimum price movements, the tick, in this case $1/32.
- Limit up/down - It has to be specified the limit of the price of the futures contract, when trading would stop. This is to prevent speculation.
- Position limits - The maximum number of contracts that the agent is allowed to hold has to be regulated. These include the total number of contracts that can be held and the maximum number of contracts expiring in any particular month. This also prevents speculation in the market.
Trading Pursuits teaches the basics of Futures trading in our TradeAbility Master Forex Futures and Commodities course. To find out more about Trading Pursuits' strategies, attend one of our FREE stock market education seminars.