The futures market is a platform that allows two parties to exchange a commodity or instrument at a pre-established price on a specified date in the future. In simpler terms, it is an agreement where one party agrees to buy from another at a specific time and location but for a fixed price.
With more than 150 years of existence, futures have evolved with different types of contracts allowing investors to even bet on political events such as elections.
Futures markets attract speculators because returns can be very high compared to other investments. At the same time, investors interested in hedging their risks use them as tools to acquire protection against potential losses in the future. You can have a look at Saxo for more information on this.
Due to their nature and structure, trading futures provides flexibility and price certainty for buyers and sellers.
Day trading
This strategy entails buying and selling the same futures contract to profit from small price fluctuations on the same day. A day trader’s goal is to earn small profits on many different trades throughout the trading day, which adds up over time. Profits are limited because they cannot hold their position overnight, so they need to close out their trade before the end of business each day. Day trading, alternatively known as ‘scalping’, involves making many micro bets across a wide range of financial instruments within concise time intervals (seconds or minutes). This mode practically makes one immune to significant loss or gain since there are more opportunities for profit than loss. Considering that you are holding your positions for minutes at a time, some novice traders might be discouraged by the many trades they need to make or by the commissions inherent in each transaction.
Position trading
A position trader does not dump and buy a new contract immediately but holds their positions for extended periods – days, weeks and even months – until they reach the desired exit point. This approach allows traders to benefit from more significant price movements through specific entry points and higher profits. To remain profitable with this method, you must have a good strategy for entering and exiting long or short positions since there is greater loss exposure. A position trader can also opt for swing trading, which involves holding a position for several days up to weeks before exiting it overnight. You can also implement a stop-loss order to minimize the risks of holding positions overnight.
Arbitrage
This method is employed when opportunities arise due to price discrepancies on different exchanges or in various forms, which allow one to buy something at a lower price and simultaneously sell it for a higher price. However, arbitrage can also occur within an exchange where two opposing bets are in the future’s direction (long vs short). Buying the cheaper bet will profit if its value rises while selling the more expensive bet will profit if its value drops. You must employ risk management since arbitrage requires taking advantage of tiny mispricings before they disappear, potentially involving large amounts of capital. Also known as “risk-less profit”, this trading mode relies heavily on technical indicators and chart patterns.
Spread trading
This trading method entails buying one contract at a lower price and selling another at a higher price, but on different exchanges or in various forms where the difference can be as much as 50%. Spreads are profitable because the market will require two transactions from you, both involving fees before it lets you out of your position. Also known as ‘Intermarket spread’, this strategy involves identifying and anticipating rates of change between related markets such as crude oil and its products, which tend to move up and down together. For instance, if the spread between Brent Crude Oil (B) and West Texas Intermediate (WTI) widened from $5.00 to $10.00 per barrel, a trader could buy the WTI contract and sell the Brent Crude Oil contract to profit from this price discrepancy.
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