The Power of the Futures Markets
The Power of the Futures Markets
Proper Knowledge is Power in trading; this means making money if you have it and losing it if you don't. The multi-asset class trader has an edge over the single asset class trader and the Futures markets are a set of markets that includes all the asset classes built into them, which makes Futures a very attractive set of markets to get to know and trade. As I always say, trading is a simple transfer of accounts from someone who doesn't know what they are doing, into the account of someone who does. Below is some information on Futures that can help get you and your trading on the right side of that equation.
Contractual agreements between two parties (buyers and sellers) through a regulated Futures exchange. Futures are contracts with expiration dates, while stocks represent ownership in a company.
Contract Specifications include, but are certainly not limited to:
ï Quantity of the item
ï Expiration month
ï Type of delivery, or cash settlement
Two Groups Buy and Sell Futures Contracts:
Benefits of Futures:
- No $25,000 minimum requirement like you have in Equities
- Plenty of leverage, low margin requirements, cheap commissions (fees)
- Most major Futures markets have close to 24-hour electronic trading
- Only set of markets in the world where you have true non-correlated / diverse opportunity which is key for managing risk and finding quality trading opportunities
- Low risk if you use protective stop orders
Strong liquidity, huge volume6. 60/40 Long-term capital gains tax treatment
Overnight gap risk not a big factor with index Futures
7. Can really help the stock and Futures trader increase odds of success
8. All asset classes in one group!!
There are many Futures markets around the world. At Online Trading Academy, we focus on specific Futures markets in our classes and the Extended Learning Track (XLT) program based on:
ï Importance to the trader's/investor's overall financial well-being
ï Volume, size, session times, and liquidity
ï Ideal price points for comfort and safety
ï Correlations to other asset classes
ï Other benefits
Examples of Various Futures Markets
How does understanding the Futures markets help the stock trader?
Knowing the Futures markets helps the stock trader in many ways. A few of them are listed below.
- Most stocks move with the S&P. Knowing how to properly analyze/trade the S&P Futures offers the short and long-term stock trader a significant advantage.
- 24-hour electronic Equity Index Futures markets, like the S&P Futures, offer the stock trader a huge advantage by being able to analyze overnight turning points as they can be responsible for the next day's market turning points.
- They also allow the stock trader to hedge "gap" risk, which is an important risk.
- Treasury Bond Futures have a strong impact on Stock price direction. Knowing how to properly analyze the Treasury Bond Futures offers the stock trader a significant advantage whether you are a short or longer term trader.
- Forecasting interest rates... Once you have the ability to quantify supply and demand levels on a chart, which is the key to knowing where the market will turn, before it turns, then you can do this in the Treasury Bond Futures. These Futures markets are the free market for interest rates. So, knowing where turning points are in these markets means knowing where interest rates are going to change direction. This is crucial information for almost everyone.
- Commodity Futures are often a leading indicator during significant turns in the economic cycle. They can help give the stock trader a strong edge when attaining a low risk / high reward entry into the stock market. They can also offer an important warning sign before a major market decline.
Answer: By having a simple rule-based strategy that has you:
Buying at price levels where willing demand exceeds willing supply
Selling at price levels where willing supply exceeds willing demand
For more information on this topic, please reread some of my prior articles on supply and demand. For more information on Futures, you can always start by accessing more information on our website - http://www.tradingacademy.com/free-resources/financial-education-center-new/Futures-Resources-Intro.aspx. We are now an educator for the Chicago Mercantile Exchange (CME Group).
Hope this was helpful, have a great day.
- Sam Seiden
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