Tips for Investing in Futures
Investing in the stock market isn’t a formula or equation that you can apply to predict returns. You need to study and analyze market trends correctly, for which proper guidance is required.
First let us understand what futures are – to put it in a nutshell, it is a kind of derivative instrument, where two parties are in mutual agreement of conducting a transaction for a set of financial instruments or physical commodities for future delivery at a particular price. There is a quite a bit of volatility associated with these markets, which increases the risks but boosts the opportunity to generate profits as well.
Common areas for futures investment are:
Supply and demand play a crucial role when it comes to determining the value of commodities (physical products) like gold, grains and energy. The “Straddles” strategy works well here, which is when you hold the same number of calls, where you predict the rates will go up and puts, where you predict the price will come down, at the same strike price and expiration date. You can also purchase a call or put option, when you speculate the price of the asset will appreciate or depreciate respectively in the near future.
Trading currencies involves predicting when prices of a currency will go up or fall in the future. The scalping method is used here, when you try for short term profits from the incremental changes in the value of a currency. Repeating this technique will ensure you make sizeable profits gradually.
Indexes and interest rates
Timing is critical when it comes to these markets, so the strategies used are time-based as well:
- Cycle Trading – Study the historical date of an underlying asset and map out the possible up and down cycles. For stock index futures, the commonly used cycles are the 23 week and 14 day cycle. Smart investing is all about analyzing the price trends as per cycles, which will lead to significant profits.
- Seasonal Trading – Trading off the seasonal effects that occur in these markets is known as seasonal trading. As per historical data, most markets show related trends year after year. If you can correctly predict these seasonal trends, then you will be able to generate great profits.
When you are getting started in the futures market as a new investor, it can be a tad daunting for you. It is advisable to know as much as you can about 3-4 futures markets by focusing solely on them, and then proceed into other types of futures. To get a brief idea you can use a calculator for computing how much your investment will be worth in the future.