Candlestick Trading Blog

---

The futures market consists of hedgers and speculators and they both practice different methods for trading futures. Hedgers aim to increase the value of their assets while limiting any potential loss in value. They use the commodities markets to take a position in order to reduce the risk of loss in their assets due to changes in price. Hedging involves securing a price now to protect against a future declining price, also known as shorting. Conversely, they also aim to secure a price now to protect against future rising prices, also known as going long. In summary, hedgers can be farmers, importers and exporters, as well as manufacturers, and they buy or sell in the futures market in order to secure a future price of a commodity that is intended to be sold at a later date in the cash market.

Speculators, on the other hand, aim to profit from changes in the price of the futures or options contract. They aim to secure a price now in anticipation of declining prices, also known as shorting. Conversely, they also aim to secure a price now in anticipation of rising prices, also known as going long. Instead of aiming to minimize risk, like hedgers, they aim to benefit from the risky nature of this type of market. Speculators, actually increase their risk in order to maximize their return on investment. To summarize, a speculator who buys a contract low so that he or she call sell it high in the future most likely buys that contract from a hedger who is selling a contract low anticipating that the prices will decline in the future. May the best man win!

What is a Futures Contact?
Futures contracts are agreements made between investors to buy or sell a specific quantity of a commodity in the future at a specific price. In the futures market, however there is rarely actual delivery of the commodity in order to fill the contract and most contracts are liquidated before the delivery date. An option on a commodity futures contract gives the buyer of the option the right to convert the option into a futures contract.

In the past 20 years, futures trading has expanded quickly from agricultural commodities to energy commodities, as well as to financial instruments. The CFTC reviews the terms and conditions of proposed futures and option contracts and conducts daily market surveillance. It can take action if there are any issues in any contracts that are being traded.

Website Specials