Futures contracts in the UK are agreements to buy or sell an asset at a predetermined price at a date in the future. Futures contracts are traded on exchanges, and anyone can change them. The most popular futures contract in the UK is the FTSE 100 index contract, which is based on the performance of the 100 largest companies listed on the London Stock Exchange. Other popular futures contracts include contracts for gold, oil, and currencies.
Investors can trade futures for speculation or hedging purposes. Hedgers use futures contracts to protect themselves from price fluctuations in the underlying asset. For example, a company that produces oil might hedge its exposure to oil price movements by buying an oil futures contract.
On the other hand, speculators trade futures contracts to take advantage of price changes. For example, a speculator might buy a gold futures contract in anticipation of a gold price rise. Many different strategies can be used when trading futures contracts. Some common methods include:
This approach is the most straightforward strategy. The trader buys a futures contract and holds it until it expires. If and when the cost of the underlying asset moves in the desired direction, the trader can take advantage of it. However, the trader will lose if the price moves in the opposite direction.
This more advanced strategy involves selling a futures contract that the trader does not own. The trader will be able to benefit if the price of the underlying asset falls. However, the trader will lose if the underlying asset’s price rises.
This type of betting allows traders to bet in the direction of the price movements of an asset without actually owning the asset. Spread betting is only available through specialized brokers.
This strategy involves buying and selling futures contracts within the same day. Day traders try to take advantage of small price movements in the market.
This strategy involves holding futures and is a more advanced strategy that traders can use to take advantage of more significant price movements.
This strategy involves taking a long-term view of the market and holding a futures contract for an extended period. Position traders might have a contract for months or even years.
This high-frequency trading strategy involves holding a position for a brief period, sometimes seconds or minutes. Scalpers try to take advantage of small price changes in the market.
This type of trading uses computer algorithms to place trades automatically. Algorithmic traders often use complex technical indicators to decide when to buy or sell.
Each strategy has its own set of benefits and risks. Some systems are more complex than others and might require more experience to trade successfully.
Many traders use a combination of different strategies to trade futures contracts. The best method for trading futures will depend on the trader’s goals, risk tolerance, and market conditions.
Some benefits of trading futures include the following:
- The ability to take advantage of price movements in the underlying asset.
- The ability to hedge against price movements in the underlying asset.
- The opportunity to speculate on the direction of the market.
- The ability to trade with leverage. Traders can use a small amount of money to control a large futures contract.
- The ability to trade on margin allows traders to deal with less capital than would be required if dealing with the underlying asset directly.
- The ability to trade 24 hours a day, five days a week.
Like any investment, there are risks involved in trading futures contracts. Some of the risks include the following:
Futures contracts can be bought or sold anytime during the trading day, so prices can move quickly, resulting in losses for the trader.
If the price of a futures contract moves against the trader, a slight movement in the underlying asset’s price can result in a significant increase or loss.
Futures contracts can be a valuable tool for traders who want to take advantage of significant price movements in the underlying asset. However, it is crucial to understand the risks involved before trading.