Futures Trading: Strategies, Risks, and Opportunities Explained

Futures Clarified: Investing in the Future

Futures are special agreements that say you must buy or sell something at a certain price on a specific date. It doesn't matter what the actual market price is when that date comes; you stick to the agreed price.

These agreements can be about raw materials like oil or wheat  or even financial stuff like stock market indexes, commodities, currencies and other assets.

They are made in a standard way so that they can be easily traded on particular markets called futures exchanges. People use futures to protect themselves from price changes or to try to make money by estimating future prices.

Key Points:
  • Futures are agreements that make you buy or sell something at a fixed price on a future date.
  • You can use them to bet on what the cost of something will be in the future.
  • They can also be used to protect yourself from losing money if prices change in a way you don't like.
  • When you use them for protection, you do the opposite of what you already do with that item.
    So, if you lose money on the article, you can make it back with the futures agreement.
  • The price of a futures agreement changes every day and is settled at the end of each trading day.

Understanding Futures Contracts: The Simple Guide

Futures contracts are like set-in-stone promises between two parties to buy or sell something at a fixed price on a specific future date. The catch? You have to stick to this price when the time comes, no matter what the actual market price is.
These contracts have an end date and a fixed price you know from the start, they are named by when they end. Therefore, if a futures contract for gold that ends in December is called a December gold futures contract.
People use the word "futures" to discuss all kinds of these contracts.

How Do Futures Contracts Function in the Market?

Futures contracts involve a buyer (long position) and a seller (short position) agreeing to exchange assets and payment on a future date, known as the delivery date. These contracts can encompass various assets, such as commodities, stocks, currencies, interest rates, and bonds, and are traded on recognized stock exchanges. Initially, both parties deposit a nominal amount called the margin with the exchange. Daily price differences are settled using the margin, and if it's depleted, it must be replenished through a process known as "marking to market."
On the delivery date, only the spot price matters. Futures contracts serve two primary purposes: hedging against risk and speculating on price movements, making them valuable tools for managing exposure and capturing market trends.

A Guide on How to Engage in Futures Trading:

  • Grasp the Fundamentals

    This segment emphasizes the need for understanding the nuances of futures trading, which     diverges from traditional stock trading. It highlights the importance of knowing contract     specifications, your role as a buyer or seller, and the expiration dates for the contracts you engage     with.

  • Be Aware of Unique Risks

     In this section, the focus is on the specific risks that are inherent to futures trading. This includes      the risk factors of market volatility and the risks tied to the use of leverage, which involves      trading with borrowed capital.

  • Choose Your Preferred Market

     This segment discusses the various choices available within the futures market, from       commodities and stock futures to more specialized areas like currency and interest rate futures.       Select a market segment that aligns with your interests and expertise.

  • Define Your Investment Strategy

     This part advises you to formulate your trading strategy clearly, whether that involves taking long      or short positions or employing a combination of both. Your strategy should be based on your risk      tolerance and your outlook on market trends.

  • Select an Appropriate Trading Platform

      The final segment underscores the importance of choosing a well-suited trading platform to meet       your specific trading needs and objectives. The platform should  offer the tools and features that      align with your trading strategy.

Types of Futures Contracts:

  • Agribusiness Futures

     First introduced at the Chicago Mercantile Exchange, these contracts cover a variety of      commodities, including grains, cotton, lumber, dairy, and more.

  • Energy Sector Futures

     Provide access to key energy commodities like crude oil and natural gas. Suitable for speculators      and hedgers.

  • Industrial Metal Futures

     Focused on metals such as gold, steel, and copper. Used for hedging against price volatility or      speculative trading.

  • Foreign Exchange Futures

     Centered on forex rates and global interest rates. Used for hedging currency risks and speculative      activities.

  • Financial Instrument Futures

     Cover future values of securities or indices like the S&P 500 and Nasdaq and debt instruments like      Treasury bonds.

Pros and Cons on Trading with Futures:

Advantages of Futures Trading:

  • Leverage

     Leverage enables traders to control a prominent position with a relatively small investment. This      amplifies potential gains and losses, but it remains attractive for those looking for high returns.

  • Liquidity

      Futures markets often possess high liquidity, allowing for easy entry and exit of positions. This             benefits short-term traders and those looking to adjust their portfolios quickly.

  • Hedging Opportunities

     Futures can effectively hedge against price volatility in other markets, protecting your investments      from adverse market conditions.

  • Diverse Range of Markets

      Futures contracts are available for various assets, including commodities, currencies, and       financial instruments, offering varied investment opportunities.

  • Lower Transaction Costs

     Typically, futures contracts have lower transaction costs than other investment vehicles, making      them cost-effective for trading.

Disadvantages of Futures Trading:

  • Amplified Losses

     The leverage that can amplify gains can also exacerbate losses, making it a double-edged sword.      This makes futures trading inherently risky.

  • Complexity

     Futures trading involves a steep learning curve due to its complex nature, including understanding      margin requirements, contract specifications, and settlement procedures.

  • Margin Calls

     Traders may face margin calls that require additional capital to maintain a position. This can lead      to financial strain and even the liquidation of assets.

  • Limited Time Frame

      Futures contracts have expiration dates, limiting the time frame for holding a position. This could       force traders into actions they may not have planned for.

  • Regulatory Risks

     Stringent regulations and oversight can introduce an additional layer of risk, particularly for those      who need to be better versed in compliance requirements.

Key Elements of a Futures Trading Plan:

  • Market Analysis

      Start by understanding market trends and economic indicators. This sets the foundation for your       trading activities.

  • Objectives

      Set clear future trading goals, such as risk reduction or profit generation.

  • Capital Allocation

      Determine the amount of money you'll invest, ensuring it aligns with your financial plans and risk       tolerance.

  • Risk Management

      Develop strategies for minimising risk, such as using stop-loss orders or diversifying your portfolio.

  • Contract Selection

      Choose the types of futures contracts that align with your investment goals, such as commodities       or financial indices.

  • Trading Timing

      Decide on your trading schedule based on market hours and your availability.

  • Entry and Exit Criteria

     Establish specific conditions for initiating and closing trades based on price points or technical      indicators.

  • Regular Review

     Commit to routinely evaluating and adapting your plan based on performance and market      conditions.

  • Record-Keeping

      Keep detailed records of all trades to help refine your future strategies.


Futures contracts offer a robust platform for hedging risk and capitalizing on market volatility across various asset classes. From commodities like oil and agricultural products to financial instruments and currencies, futures provide an avenue for diversification and strategic investment. They are versatile tools in an investor's portfolio with features like leverage, high liquidity, and diverse market offerings. However, it's essential to understand the associated risks, including amplified losses and margin calls, which make the role of a well-structured trading plan indispensable.

For those seeking a reliable and comprehensive trading platform, Mexem.com offers futures trading among its myriad investment options, with robust tools for market analysis, risk management, and many contract types.

The information on mexem.com is for general informational purposes only. It should not be regarded as investment advice. Investing in stocks involves risk. A stock's past performance is not a reliable indicator of its future performance. Always consult a financial advisor or trusted sources before making any investment decisions.

Don't have an Account yet?

Open An Account