Best Bitcoin Futures Trading Exchanges
Futures Trading 101
As we explained in our post about derivatives, a derivative is a financial term for something that “derives” its value from its relation to another asset.
Futures are one of the top three derivative contracts, as well as one of the oldest around. They were originally developed in order to help farmers secure themselves against changes in the crop prices between planting and the time when they could be harvested and sold on the market. This is the reason why the majority of futures is focused on things such as grains (corn) and livestock (cattle). Of course, the futures market expanded over the course of time and now includes contract connected to a wide variety of assets, including but not limited to:
- energy (oil)
- precious metals (gold)
- industrial metals (steel)
- stocks (S&P 500)
- bonds (treasury bonds)
How Futures Trading Works
Futures, like other derivatives, have limited lifetime. When the time expires, its value comes down to zero.
There are three ways to trade with futures.
Trading on your own – user can open its own account and use it for trading. This option carries the highest risk as the trader takes responsibility for managing investment, ordering trades, maintaining margins and analyzing the market.
Using a managed account – user can get a managed account. The user’s broker would have the permission to trade on his behalf, according to the agreement they made. This account carries less risk, but the owner would have to pay a management fee and still is responsible for any losses incurred.
Joining a commodity pool – this way of trading with futures carries the lowest risk. The money is put into one wallet from all the participants and traded as one. The profits and losses are spread across all participants equally. Commodity pools also have the ability to invest in a wide variety of futures.
The Risks of Futures Trading
The trading with futures carries a lot of different risks. Some of them are listed below.
Unlimited liability is the main risk of trading with futures. This means that losses could be greater than the investment.
The leverage in futures trading can go from 5 to 100 times. Sure, leverage is great when the price goes in the way trader expects, but if it starts moving against user’s favor, he could lose a lot of money.
The market is very volatile in the trading with futures. This means that the trading strategy must be executed each time perfectly in order to minimize the risks.
There are also other risks which involve different policies, currency movement, and brokerage unprofessionalism.
Trading with futures can bring a lot of money, but it also requires a lot of knowledge in order to be done safely.
Inform yourself about the risks before opening your account. We really would not recommend trading without know what are you getting into.