May 24, 2016

Futures (Contract)

What is Futures (Contract)?

A term used to designate all contracts covering the purchase and sale of financial instruments or physical commodities for future delivery on a futures exchange.

A futures contract is a legally binding obligation to buy or sell the underlying product, asset or instrument at some time in the future, at a price agreed upon today.

Futures contracts are standardized according to the quality, quantity, and delivery time and location.

Invest in Future and Index CFDs online

Many online Forex brokers offer CFD Futures which are a great way to gain access to a variety of Futures exchanges with the additional advantages of lower margin requirements and low costs.

CFD Futures are highly liquid financial instruments which is one of the many reasons that they are an attractive trading instrument.

All CFD Futures orders flow directly onto the relevant underlying exchange which provides market pricing in line.

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Unique Features of Futures Contract

Futures are a sufficiently liquid and convenient financial tool.

All the parameters and characteristics of the underlying asset, which is the basis of any futures contract, are strictly regulated by the exchange.

Futures contracts on any futures asset are standardized, due to which they are interchangeable and easily pass from hand to hand in the trading process.

Group of characteristics for the underlying asset and the futures itself, which is regulated and defined by the specific exchange is called specification of futures.

Usually it is available on the websites of specific exchanges in a tabular form.

Understanding of the specification is essential for correct and safe process of trading, so pay attention to the detailed description of the key parameters of specifications:

  • The underlying asset
    Commodity or a financial instrument, forming the basis of the futures. Such as oil, gold, the British pound, the index S & P500, corn, government bonds, and so on;
  • The quality of the asset
    All the possible features are taken into account. If it is oil, it specifies the brand, the allowable levels of impurities, and places of shipment. If it is gold the bullion fineness and weight, the presence of serial numbers and stamps of repositories are stipulated;
  • The volume of the contract
    The quantity of the underlying asset in a futures contract is defined – 500 barrels of oil, 100 ounces of gold, 62,500 British pounds;
  • Months of supply
    In parallel, several futures are traded on one underlying asset, they differ only in the delivery dates. For example, corn has the following delivery months – March, May, July, September and December;
  • Type of delivery
    What happens upon expiry of a futures contract – purely financial calculations (calculated futures) or the physical delivery of the underlying asset (the deliverable futures);
  • The delivery period
    The time interval of possible supply is defined in advance. For example, from the first to the last working day of the month deliverable;
  • Hours of bidding
    For example, the British pound: bid in an open auction – from 7:20 to 14:00 Chicago time, electronic trading – from 17:00 to 16:00 the next day (day and night with an hour break);
  • Currency of the contract
    Typically, the U.S. futures are traded in dollars, but there are rare exceptions: the euro, the Yen;
  • Quotation of the contract
    What exactly the current price of the futures shows is the number of cents per bushel of wheat, the number of dollars per ounce of palladium and so on;
  • The minimum price change
    With which tick the price of the asset will change. For example, 0.01 per cent (the Swiss franc) or 10 cents (per ounce of platinum);
  • The maximum price change
    As an example – when the price of oil changes for $ 10 a day during the day session, trading is suspended for five minutes. If the price has changed significantly, biddings on certain contracts may be closed before the next trading session;
  • The limits on open positions
    In order to protect the market from the effects of major players, the exchange limits the number of contracts that may be in the hands of one player. For example, no more than 1,500 platinum contracts on any of the months of delivery and not more than 150 contracts at the approach to the first day of taking delivery;
  • The last trading day
    The exchange fixes a day of the delivery month, after which trading on the contract expires. Usually it is written in the form: Copper futures – the auction ends at the end of the third business day after the end of the month preceding the delivery;
  • Ticker
    Designation of futures on exchange. Usually it is 1-3 letters – CL (oil), W (wheat), JY (Yen), DJ (index Dow Jones).

Why you should trade Future CFDs?

There are many advantages of trading Future CFDs online.

1. High Market Liquidity

Futures markets are highly liquid enabling the trader to move in and out of the market swiftly and potentially with size.

This liquidity is particularly attractive for the active day trader.

2. You can apply technical analysis

Many traders use Technical Analysis for their trading strategies.

Futures markets respond to technical setups over and over again with precision.

In fact, the predominance of technical strategies has almost made this form of trading self-fulfilling which is of great benefit to the technical trader.

3. The market is open almost 24 hours a day

Traders can take advantage of a 24hour market at any geographical location at a time to suit individual needs.

4. Lower Commissions

The rates offered on index futures can be significantly lower than the underlying single stocks.

Thus traders can gain a leveraged vehicle to the index at a low cost.

5. Lower Risk

Due to the extended trading hours, futures offer potential lower risk than stocks due to reduced gap risk.

Traders can place stop orders throughout the day and night thus reducing the risk of adverse moves.

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