FUTURES

The idea behind this thread is to start a discussion on trading futures (& options) and of course to post any trading ideas if you have time.

We have many traders on MoneyAm who use futures but also many who are not sure what they but would like to know!

Futures were originally introduced as an insurance mechanism for farmers and manufacturers who wanted to fix a price for crops at a future date. The farmer wanted to be able to make plans knowing the price he would get for his crops. For the manufacturer, fixing the price meant that he could ensure consistency in the prices he charged. A future is an agreement (obligation) to buy or sell a given quantity of a particular asset, at a specified future date, at a pre-agreed price.

Futures market participants may be divided into two broad categories: Hedgers, who actually deal in the underlying commodity or financial instrument and seek to protect themselves against adverse price fluctuations, and speculators (Like Me!), who seek to profit from price swings.

It is a very efficient and cost effective way of buying or selling a wide choice of instruments such as the Indices, Bonds, Gold or currencies at very competitive rates. Some example prices can be seen on the future price box to the right.

If you buy & sell tracker stocks such As Lloyds or RBOS this can be a much cheaper way of trading your guess on the future market direction.

Futures are constantly moving so there is no wait for your stock to wake up! They can also move very quickly on breaking news so have to be traded with care.

I trade mainly the FTSE contract and I buy it or sell it in multiples of 1 Contract which are equivalent to 10 a point. Just as you would buy or sell a set number of equities ..

On the right is the $5 Dow Jones June mini contract which I also trade a lot, especially if Coronation street isn't on :-)

You can also use 'Spread Betting' to buy or sell the indices but this usually works out more expensive. However on the good side you can set stop losses at a cost.

For example Spread bet the DOW above at $5 a point and 4 point spread from the mid would mean buying at approx 10037 and selling at 10028. An initial LOSS simply by placing the order of around 8 points or $40

If I was trading this with Futures I would want to get inside the spread just as with 'Direct Access' with futures. And as with Level2 I can see how many orders are on the bid and offer. I would be charged around $5 (Or less) per trade and I would place a bid to buy at 1032 or a bid to sell at 1033. If I was filled I would be immediately 1 point in profit from the mid price. With the cost of the trade deducted it has really cost me nothing and I might even be in profit!

The Spread Betting Cost $40 against the Futures Cost of $10 or less! With any broker it is a good idea to bargain for the best deal you can get.

This is a very brief introduction to futures to see what the interest level is like.

I hope you join the thread, share your experiences and ask questions.

Also of course tell us which brokers you use and the best deals around!