Commodities trading has always been feared by many self directed investors and stock traders. Once the risks are explained and understood few investors fear commodities as they once did. The risks with futures trading can be understood when one takes the time to learn the risk.
No matter what a trader or investor is interested in opening a position on they have to answer one key question, which way will the price move? In order to open a position a trader or investor needs to have an idea of where it is going. This means a move against any open position is the same risk dealt by all traders no matter what they are buying or selling.
Commodities can either move up or down in price as is the case with stocks for example. The commodity contract requires that the trader or investor make up his or her mind about where that price will be in the future. A position is then opened based on that traders belief of where that price will be in the future.
A trader can open one of two positions on a contract. The first is a buy the other a sell or a short. The buy means you believe the contract price will rise, while the short means you believe the price will fall. Both losses will come when the price moves in the opposite direction of your position.
Margin in futures is different then the margin requirements in stocks. In stocks you have to place 50 percent of the value on margin where as in futures you only place 10. The lower margin means extra leverage which means a small move against an open position will result in big losses.
Margin is often where the true risk associated with commodities appears. Since an investor or trader is placing a small amount of money down but controlling the total value any move against their position is magnified. This risk can mean penny moves in a contract against a traders position can equal substantial losses. The losses incurred will have to be made up by the trader.
There is a belief that a thousand barrels of crude oil will suddenly appear on your front lawn if you buy and hold a crude contract. All commodities contracts have an expiration month, almost all traders and investors simply close that position before expiration and move into the next contract thus eliminating the risk of delivery.
The risks with futures trading are unique to the commodity and futures world. Newer investors are fearful of buying and selling futures because they do not truly understand the risks. Margin risk is a double edged sword. Margin can increase the equity in the account quickly but that same leverage can cause massive losses if the trader is not careful.
No matter what a trader or investor is interested in opening a position on they have to answer one key question, which way will the price move? In order to open a position a trader or investor needs to have an idea of where it is going. This means a move against any open position is the same risk dealt by all traders no matter what they are buying or selling.
Commodities can either move up or down in price as is the case with stocks for example. The commodity contract requires that the trader or investor make up his or her mind about where that price will be in the future. A position is then opened based on that traders belief of where that price will be in the future.
A trader can open one of two positions on a contract. The first is a buy the other a sell or a short. The buy means you believe the contract price will rise, while the short means you believe the price will fall. Both losses will come when the price moves in the opposite direction of your position.
Margin in futures is different then the margin requirements in stocks. In stocks you have to place 50 percent of the value on margin where as in futures you only place 10. The lower margin means extra leverage which means a small move against an open position will result in big losses.
Margin is often where the true risk associated with commodities appears. Since an investor or trader is placing a small amount of money down but controlling the total value any move against their position is magnified. This risk can mean penny moves in a contract against a traders position can equal substantial losses. The losses incurred will have to be made up by the trader.
There is a belief that a thousand barrels of crude oil will suddenly appear on your front lawn if you buy and hold a crude contract. All commodities contracts have an expiration month, almost all traders and investors simply close that position before expiration and move into the next contract thus eliminating the risk of delivery.
The risks with futures trading are unique to the commodity and futures world. Newer investors are fearful of buying and selling futures because they do not truly understand the risks. Margin risk is a double edged sword. Margin can increase the equity in the account quickly but that same leverage can cause massive losses if the trader is not careful.
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The practice of futures trading has never been more convenient or open. When you are looking for automatic trading software be sure to select products from a respected business.
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