Many people think that Futures Trading is a hard concept to grasp. That somehow, commodity futures trading is very different from plain old investing. But it really is not. Learn futures trading, its ins and outs, and once you understand the inner workings and get a hang of it, you will be well on your way to success.

People have a common misconception that commodity exchanges around the world determine or establish the prices at which commodity futures are bought and sold. This is not true. Prices are determined by supply and demand conditions. Just keep in mind that if there are more buyers than sellers, prices will be forced up and vice versa.

Imagine the price of crude oil during the summer and winter months.

Buy and sell orders, which originate from all sources and are channeled into the exchange-trading floor for execution, are actually the ones to determine the prices. These buy and sell orders are translated into actual purchases and sales on the trading floor. When you learn futures trading these are critical to understand.

The major function of the futures market is the transfer of risk, and increased liquidity between traders with different risk and time preferences, for instance from a hedger to a speculator.

To learn futures trading properly, a method used to eliminate or minimize risks that occur when the prices in the market fluctuates. Through the years, standardization has helped both the buyer and the seller. There will always be the underlying instrument, or what is being exchanged, like cotton or crude oil. Then the type of settlement, will it be paid in cash when it becomes due? Or will it be in kind or bonds?

Futures contracts are exchange-traded derivatives. A futures contract is traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price.It is really a very linear concept, all you need is a commodity, a buyer, a seller and a future date on which the trade is executed.

Futures contracts are basically for assumption or hedging.

There are two groups of futures traders:

  • the hedgers, who are interested in the underlying commodity and are seeking to hedge out the risk of changes in price.
  • and the speculators, who are interested in making a profit by predicting market moves and buying a commodity “on paper.”

For example, commodities in the market can be bought today, at today’s price, with the speculation of selling them at a higher price in the future.

On the other hand, hedging protects against fluctuations in market prices. This protection is made by allowing the risks of price changes to be transferred to professional risk takers.But this is where money can be made.By doing the required research and following market trends, one can predict the future price of a certain commodity, like oil, gold,silver or even cotton.

Understanding futures online trading and the future trading platforms is the key to making money in these types of transactions. It entails some risk, like all investment vehicles, but the payoff can be great. One advantage you get when you learn futures trading is that since the prices are distributed via the internet, it makes online futures trading very convenient and simple for an individual. Nowadays many brokers offer their services for trading commodity futures online.

Because a little bit more risk is involved in  futures online trading than stock trading, you must judge for yourself whether or not this type of investing is for you.

Keep in mind that an investment in futures, just like any other investment, even in mutual funds, can result in losses. Past performance results does not necessarily indicate future performance results. But with due diligence, one can spot real winners early on, and when you learn futures trading it really pays off!

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