How We Trade in Futures Market

A futures contract is basically a standardized version of the normal cash market in a respective manner where the two parties will come into a contract to buy or sell a specified asset (eg. Oil, gold, copper etc) of standardized quantity and quality at a specified future date at a price agreed today. This price will decided on the basis of the future price.

In the futures contract exchange plays an important role in trading, because all contract are traded on a future exchange. The exchange is a guarantee in which if any party become a defaulter then the exchange will complete the trade on specific time line and put fine on the defaulter party. The futures contract are not direct securities like stocks, bonds, right or warrants, but they are the indirect securities though they are a type of derivative contract. The another issue is How the price will be decided, The price will decided on the basis of forces of supply and demand among comparing buy and sell orders on the exchange at the time of the purchase or sale of the contract. The future date on which sell and buy process complete is called the delivery date or final settlement date. A closely related contract is a Forward contract; it different from the on some basic issues. Future contracts are very similar to forward contracts, except they are exchange-traded and defined on standardized assets means there is no exchange in forward contract.

The other thing is margin. Unlike forwards, futures typically have interim partial settlements or “true-ups” in margin requirements. For typical forwards, the net gain or loss accrued over the life of the contract is realized on the delivery date. The other point in futures trading is margin. The term margin use to minimize credit risk to the exchange, traders must post a margin or a performance bond, typically 5%-15% of the contracts value. The margin use to minimize counter party risk to traders, trades executed on regulated futures exchanges are guaranteed by a clearing house. The clearing house becomes the buyer to each seller, and the seller to each buyer, so that in the event of a counter party default the clearer assumes the risk of loss. This enables traders to transact without performing due diligence on their counter party. Margin requirements are waived or reduced in some cases for hedger who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position. So these are the basic introduction of the futures market and futures trading tips.

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