Traders commonly use a few different futures trading techniques in the UK. This article will look at three of the most popular techniques and explain how they work. We will also explore the benefits of each technique and discuss when it might be appropriate to use them.
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What are futures contracts, and why are they used in trading?
Futures contracts are agreements to buy or sell an asset at a later date, at a specified price. They are commonly used in trading because they allow traders to speculate on the future price of an asset without having to own the underlying asset. It means traders can take advantage of price movements without being exposed to the risks associated with owning the asset.
Futures contracts are traded on exchanges, and the prices are determined by supply and demand. The contract specifies the quantity and quality of the underlying asset and the date and price at which it will be delivered.
Most futures contracts are not settled in cash. Instead, the difference between the price at which the contract is bought or sold, and the price of the underlying asset at the time of delivery, are settled in cash. It is known as a cash settlement.
What are the most popular futures trading techniques in the UK?
The three most popular futures trading techniques in the UK are:
Trend following
Trend following is a technique that involves buying futures contracts when prices are rising and selling them when prices are falling. The aim is to profit from market price movements without predicting where prices will go next.
To do this, traders will use technical analysis to identify trends in the market and then enter into trades accordingly. Trend following can be a successful technique in volatile markets, allowing traders to take advantage of rising and falling prices.
Scalping
Scalping is a technique that involves taking small profits regularly. Traders who use this technique will enter and exit the market quickly to make small profits from each trade. This technique is often used by day traders, who close out their positions at the end of each day. Scalpers will typically look for markets that are highly liquid so that they can get in and out of trades quickly.
Scalping can be risky, as there is the potential to lose money if the market moves against the trader. However, if done correctly, it can be a very profitable way to trade.
Hedging
Hedging is a technique that is used to protect against losses in the market. When hedging, traders will take offsetting positions in different markets or assets within the same market. It means that if prices move against one position, the other position will profit.
Hedging can be a complex technique and unsuitable for all traders. Institutional investors often use it with large sums of money to invest.
What factors influence the price of a futures contract on the market?
Many factors influence futures prices, including:
The price of the underlying asset- If the price of the underlying asset rises, the futures contract price will also rise.
The level of supply and demand- If there is more demand for a futures contract than supply, the price will increase. Conversely, the price will decrease if there is more supply than demand.
The time to expiration- The closer a futures contract is to expire, the less time it is for the price to move. It means that contracts about to expire are often less volatile than those with further to go.
Interest rates- Higher interest rates tend to lead to higher prices for futures contracts. Higher interest rates make it more expensive to carry a position overnight.
How can you trade futures contracts successfully in the UK marketplaces?
You need to do many things to trade futures contracts in the UK marketplaces successfully. These include:
Doing your research- Before you start trading, it is vital to have a good understanding of the market. It means doing your research and learning as much as possible about the different types of futures contracts available.
Finding a broker- To trade on the UK marketplaces, you will need to find a broker who offers access to these exchanges. Compare different brokers and their fees before deciding which one to use.
Choosing the proper contract- There is a wide range of futures contracts available, so it is crucial to choose the one that is right for you. Consider factors such as the underlying asset, the expiration date, and the amount of risk you are willing to take.Managing your risk- When trading futures contracts, it is vital to manage your risk carefully. It means setting stop losses and considering the amount of money you are willing to lose on each trade.
