• Futures trading in the stock market, a highly futuristic approach towards the stock market by investors who look forward to gaining on conjecture about future movement of various assets, had its origin in the mid-19th century when grain farmers used futures in order to fix prices for their produce.  

• This system has grown since then to include a wide range of securities, commodities, and financial instruments. In futures trading, investors either speculate on the direction of prices or hedge against probable risks through what is known as a futures contract-a legal agreement to buy or sell an asset at some predetermined price on a future date.  

• With modern-day trading platforms, access to futures trading and its execution have become prompt, hence proving to be a more potent tool to help investors negotiate the labyrinth called the stock market. 

What are futures? 

• A futures contract is an agreement to sell or buy something in the future at a pre-determined price on a pre-specified date. Its underlying could range from anything between commodities, such as oil and gold, up to stock indices, currencies, and even more. 

How does future trading in stock market works? 

Contract specifications:  

• Every futures contract specifies in minute detail the underlying asset, the contract size, the date of expiration, and price. 

Margin requirements: 

• Margin requirements are such that traders will have to make a margin, or only a fraction of the whole contract value, to open a position in futures. It would mean that with this leverage, one can hold much larger positions with much less capital, and this also means losses tend to be greater than the initial margin. 

Long and short positions:  

• Traders can take long positions where they buy futures contracts in anticipation that prices may rise or take a short position by selling futures contracts in anticipation that prices may fall. The difference is a realization of profit or loss when the price movement of the underlying asset takes place in the direction of the market participant relative to the contract price at expiration. 

Advantages of future trading in stock market 

High leverage:  

• That means one can achieve high exposure within the futures trading market with relatively small capital, hence enhancing the profit percentage. 

Liquidity:  

• Generally, futures markets are highly liquid; hence, it is quite easy to get in and out of the market. 

24/5 trading:  

• The futures markets frequently provide trading that is practically around the clock with abundant opportunity to react to events and changes happening anywhere in the world. 

Steps to start future trading in the stock market 

Step 1: Understand futures contracts 

• Futures are a type of derivative contract that binds the buyer to buy and the seller to sell an asset at a pre-established price at some date in the future. The trader who wants to start futures trading should be well aware of some important specifications of the contract, such as underlying instruments, contract size, date of expiration, and price upon agreement. This knowledge is of paramount importance when one makes a decision regarding trading. 

Step 2: Assess your risk appetite 

• Trading futures is a very risky venture, and you can lose more than the amount you initially invested. Please take into consideration the amount of financial risk you are able to handle without affecting your lifestyle. Knowing your personal risk tolerance will help guide trading decisions and provide a balance between trading and maintaining your financial well-being. 

Step 3: Choose a futures market to trade 

• Choose a futures market that fits your style of trading and the amount of risk you are willing to take. Some markets, like those in the stock indices, tend to be extremely volatile; other markets, such as certain commodities, are normally much lower in volatility. Choose a market that offers a fit for your investment strategy and risk profile. 

Step 4: Open a futures trading account 

• You will need to open a trading account with a broker who deals in futures trading. Do your homework by researching the best broker, the fees involved, and the requirements for such a transaction. This account is your key to futures trading. 

Step 5: Arrange for margin requirements 

• Most of the futures contracts are subject to an initial margin deposit of 5-10% of the value of the contract. Be sure to be well-funded for the margin requirements so you should be able to keep your positions on. Margin is a sort of security deposit against the loss. 

Step 6: Develop a trading plan 

• Create a complete trading plan that involves your entry and exit strategy, including the rules of risk management and position sizing. Your plan should be based on sound analysis to be in tune with your accepted risk tolerance. The result of a well-set plan will be much discipline and focus when one is trading in the fast-paced futures market. 

Step 7: Practice with a demo account 

• First, practice futures trading on a demo trading account before exposure to a live one with actual money. This is a completely risk-free environment, and one gets good experience in handling futures trading while fine-tuning one’s strategies. 

Step 8: Place buy/sell orders 

• Once comfortable, you will place buying or selling orders with your broker per your strategy. Go ahead with the execution of the trade, taking positions in the futures market by implementing your various developed strategies. 

Step 9: Monitor and manage positions 

• Regularly observe market conditions and your positions. Where necessary, according to your trading plan and rules of risk management, perform proper positioning and closing of positions. Vigilance helps to respond to changes in markets and protects your investments. 

Strategies to start future trading in the stock market 

The pullback strategy 

• Pullback strategy involves determining a trend and then waiting for a partial pullback of the price to enter the trade. A trader buys on a pullback in an uptrend or sells on a pullback in a downtrend, with the expectation of the price continuing in the direction of the original trend. 

Going long 

• A long position would be to buy a futures contract, expecting an increase in the price. Simple enough that the strategy fits the belief of any trader who believes the price of the underlying asset would rise. A successful long position can bring in profits when the price exceeds the purchase price at expiration. 

Breakout trading 

• Breakout trading involves entry at the exact time when the price starts moving through predefined support or resistance levels. Traders believe that once the price breaks out, it tends to continue in that direction with great force, enabling them to ride a large price movement. 

Spread trading 

• Spread trading refers to buying one futures contract and, at the same time, selling another related futures contract. A spread trade is taken up in order to assume the price difference or spread between two contracts with the view of benefiting from it. It reduces risk since a trader is less exposed to the volatility of the market as compared to an outright position. 

Order flow trading 

• This approach is a logical strategy of market analysis, attempting to project future price movements using the orders that are coming onto the market. The trader is watching the volume and type-order-buy or sell order-to measure the sentiment of the marketplace as it unfolds, appropriately making decisions of entry and/or exit. 

Hedging 

• Hedging is a type of risk management in which, in order to avoid losses that could have happened from an investment, one has to take an opposite position related to security. With futures contracts, traders can protect against adverse price movements in their portfolios. To illustrate, assume that a trader holds a stock for which he thinks that it may decline; therefore, that trader sells the futures contract to hedge the risk. 

Price speculation 

• The basic approach involves forecasting the future movements that may take place in an asset’s price. Traders will be initiated into buying or selling futures contracts based on their analysis made from market trends, economic indicators, and other relevant data. There would be huge profits if the forecast turned out correct, but this strategy entails huge risks. 

Conclusion 

• Trading in the Forex market of stocks can be an exciting investment if acquired with the right tools and strategies. Thaurus offers a suite of services that provide comprehensive support in trading. Beyond providing detailed heatmaps, Fibonacci analysis, and pivot points, it really gives you more insights into some of the trends and forms of price action that are entering the market.  

• There are also daily signals that can enable you to improve your trading decisions over time. Having all these resources at your fingertips will enable you to confidently move through the complications of Forex trading with more accurate speculation. Begin trading with Thaurus and unleash our most advanced tools for maximum success in Forex trading. 

• Contact us to know more about futures trading in the stock market and our team will revert in 24 hours.