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A Guide to Understanding Opportunities and Risks in Futures Trading
Basic Trading Strategies
Dozens of different strategies and variations of strategies are employed by futures traders in pursuit of speculative profits. Here are brief descriptions and illustrations of the most basic strategies.
Buying (Going Long) to Profit from an Expected Price Increase
Someone expecting the price of a particular commodity to increase over a given period of time can seek to profit by buying futures contracts. If correct in forecasting the direction and timing of the price change, the futures contract can be sold later for the higher price, thereby yielding a profit. If the price declines rather than increases, the trade will result in a loss. Because of leverage, losses as well as gains may be larger than the initial margin deposit.
For example, assume it’s now January. The July crude oil futures price is presently quoted at $15 a barrel and over the coming month you expect the price to increase. You decide to deposit the required initial margin of $2,000 and buy one July crude oil futures contract. Further assume that by April the July crude oil futures price has risen to $16 a barrel and you decide to take your profit by selling. Since each contract is for 1,000 barrels, your $1 a barrel profit would be $1,000 less transaction costs.
|Price per barrel||Value of 1,000 barrel contract|
* For simplicity, examples do not take into account commissions and other transaction costs. These costs are important. You should be sure you understand them.
Suppose, instead, that rather than rising to $16 a barrel, the July crude oil price by April has declined to $14 and that, to avoid the possibility of further loss, you elect to sell the contract at that price. On the 1,000 barrel contract your loss would come to $1,000 plus transaction costs.
Note that if at any time the loss on the open position had reduced funds in your margin account to below the maintenance margin level, you would have received a margin call for whatever sum was needed to restore your account to the amount of the initial margin requirement.
Selling (Going Short) to Profit from an Expected Price Decrease
The only way going short to profit from an expected price decrease differs from going long to profit from an expected price increase is the sequence of the trades. Instead of first buying a futures contract, you first sell a futures contract. If, as you expect, the price does decline, a profit can be realized by later purchasing an offsetting futures contract at the lower price. The gain per unit will be the amount by which the purchase price is below the earlier selling price. Margin requirements for selling a futures contract are the same as for buying a futures contract, and daily profits or losses are credited or debited to the account in the same way.
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For example, suppose it’s August and between now and year end you expect the overall level of stock prices to decline. The S&P 500 Stock Index is currently at 1200. You deposit an initial margin of $15,000 and sell one December S&P 500 futures contract at 1200. Each one point change in the index results in a $250 per contract profit or loss. A decline of 100 points by November would thus yield a profit, before transaction costs, of $25,000 in roughly three months time. A gain of this magnitude on less than a 10 percent change in the index level is an illustration of leverage working to your advantage.
Assume stock prices, as measured by the S&P 500, increase rather than decrease and by the time you decide to liquidate the position in November (by making an offsetting purchase), the index has risen to 1300, the outcome would be as follows:
A loss of this magnitude ($25,000, which is far in excess of your $15,000 initial margin deposit) on less than a 10 percent change in the index level is an illustration of leverage working to your disadvantage. It’s the other edge of the sword.
While most speculative futures transactions involve a simple purchase of futures contracts to profit from an expected price increase — or an equally simple sale to profit from an expected price decrease — numerous other possible strategies exist. Spreads are one example.
A spread involves buying one futures contract in one month and selling another futures contract in a different month. The purpose is to profit from an expected change in the relationship between the purchase price of one and the selling price of the other.
As an illustration, assume it’s now November, that the March wheat futures price is presently $3.50 a bushel and the May wheat futures price is presently $3.55 a bushel, a difference of 5¢. Your analysis of market conditions indicates that, over the next few months, the price difference between the two contracts should widen to become greater than 5¢. To profit if you are right, you could sell the March futures contract (the lower priced contract) and buy the May futures contract (the higher priced contract).
Assume time and events prove you right and that, by February, the March futures price has risen to $3.60 and the May futures price is $3.75, a difference of 15¢. By liquidating both contracts at this time, you can realize a net gain of 10¢ a bushel. Since each contract is 5,000 bushels, the net gain is $500.
Net gain 10¢ bushel
Corn Dec ’19 (ZCZ19)
Corn Futures Market News and Commentary
At Friday’s close corn futures were a 1/4 to a penny higher in Sept and Dec contracts, while May and July contracts were lower. May corn was 15 1/4 cents lower from Friday to Friday. Private exporters reported a sale 567,000 MT of corn to China. Delivery for the sale is spilt with 504,000 MT for 2020/21 delivery and the remaining 63,000 for old crop. The CFTC reported managed money corn traders were 8,217 contracts less net short on Tuesday than the previous week. Open interest for corn spec traders was down 35,719 contracts to 341,810. That is the lowest since July 19 of 2020. March corn exports from Brazil were 494,600 MT which was down 332,100 MT from 2020. Ethanol exports from Brazil totaled 75.1m L in March, which was a 41.5% drop off yr/yr.
May 20 Corn closed at $3.30 3/4, down 2 3/4 cents,
Jul 20 Corn closed at $3.36 3/4, down 1 3/4 cents,
Sep 20 Corn closed at $3.42 1/4, up 1/4 cent,
Dec 20 Corn closed at $3.50 3/4, up 1 c. Read more
Commitment of Traders Positions as of Mar 31, 2020
More Corn Quotes
Most Recent Stories
Things were wild this week but back in.
It was a wild start to Q2 with cattle markets making new lows, grains selling off and a record surge in unemployment. Payroll protection applications started to be accepted Friday with the US economy on.
More down side for cattle and hogs
At Friday’s close corn futures were a 1/4 to a penny higher in Sept and Dec contracts, while May and July contracts were lower. May corn was 15 1/4 cents lower from Friday to Friday. Private exporters.
Soybeans closed the last trading day of the week 2 to 4 1/2 cents lower. For May futures that was a wk/wk drop of 27 1/4 cents. Soymeal futures closed higher than the midday lows but still down by $5.90/ton.
Friday gains in the wheat market were not enough to erase the earlier drops. SRW wheat futures gained 7 1/2 cents, but were down 22 cents wk/wk. May KC wheat was up 8 cents on Friday, but down 13 3/4 cents.
Supply Side Rally Play
I follow many trading products using the same mathematical formulas for intraday, daily and weekly trends.
Corn futures are down by as much as 5 1/4 cents in the front months. Private exporters reported a sale 567,000 MT of corn to China. Delivery for the sale is spilt with 504,000 MT for 2020/21 delivery and.
Barchart Technical Opinion
The Barchart Technical Opinion rating is a 56% Sell with a Weakest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Corn Related ETF s
Key Turning Points
InsideFutures is a twice weekly newsletter that features a selection of the latest and best commodities commentary appearing on Barchart.com. Delivered every Wednesday and Friday morning to your inbox.
Stocks: 15 20 minute delay (Cboe BZX is real-time), ET. Volume reflects consolidated markets. Futures and Forex: 10 or 15 minute delay, CT.
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The Quote Overview page gives you a snapshot view for a specific futures symbol. During market hours, delayed exchange price information displays (Futures: 10 minute delay, CST.) and new delayed trade updates are updated on the page (as indicated by a “flash”).
Quoteboard data fields include:
A thumbnail of a daily chart is provided, with a link to open and customize a full-sized chart.
This section shows the Highs and Lows over the past 1, 3 and 12-Month periods. Click the “See More” link to see the full Performance Report page with expanded historical information.
More Futures Quotes
This section displays additional open contracts for the futures symbol you are viewing.
Barchart Technical Opinion
The Barchart Technical Opinion widget shows you today’s overally Barchart Opinion with general information on how to interpret the short and longer term signals. Unique to Barchart.com, Opinions analyzes a stock or commodity using 13 popular analytics in short-, medium- and long-term periods. Results are interpreted as buy, sell or hold signals, each with numeric ratings and summarized with an overall percentage buy or sell rating. After each calculation the program assigns a Buy, Sell, or Hold value with the study, depending on where the price lies in reference to the common interpretation of the study. For example, a price above its moving average is generally considered an upward trend or a buy.
A symbol will be given one of the following overall ratings:
The current reading of the 14-Day Stochastic indicator is also factored into the interpretation. The following information will appear when the following conditions are met:
A seasonal chart is designed to help you visualize how futures contracts have performed during a calendar year. They help show patterns and price trends for commodities whose prices often change with the seasons.
The widget offers two types of displays: one based on Last Price of the commodity you are viewing, compared to the average last price of the same commodity for the five prior contracts. The second chart, based on Price Change, is available for Barchart Premier users. This chart starts at “0” at the left-most price scale, then plots the price change for the contract you are viewing against the average price change for the 5 prior contracts.
Find exchange traded funds (ETFs) whose sector aligns with the same commodity grouping as the symbol you are viewing. Analysis of these related ETFs and how they are trading may provide insight to this commodity.
Commitment of Traders Positions
This widget shows the latest week’s Commitment of Traders open interest. The COT data, as reported by the US Commodity Futures Trading Commission (CFTC), is from Tuesday, and is released Friday by the CFTC. Reporting firms send Tuesday open interest data on Wednesday morning. The CFTC then corrects and verifies the data for release by Friday afternoon. The Barchart site’s data is then updated, after the official CFTC release.
You will see the Long and Short positions from the Legacy Commitments of Traders report, plus either the Long and Short positions from the Disaggregated Report or the Financial TFF Report.
A link to view a chart with both COT studies applied is also available.
For comparison purposes, find information on other symbols contained in the same sector.
cmdtyNewswires is Ag market commentary for Grains and Oilseeds, Energy, Gold, Silver, Cocoa, Coffee, and Sugar markets.
Most Recent Stories
View the latest top stories from the Associated Press or Canadian Press (based on your Market selection).
Short Selling Forex: How to Short a Currency
Did you know that you can trade both bull and bear markets?
We all know how the story goes when prices rise:
You buy and hold an investment until it reaches a higher price and make a profit on the difference between the buying and selling price.
However, many traders don’t understand how bear markets, i.e. falling prices can be used to profitably trade.
What Does Short-Selling Mean?
The usual way of making a profit in financial markets has long been this: you buy a stock, wait for its price to rise and sell it later at a higher price. Your profit would be the difference between your buying and selling price. This is what most stock traders do, they’re looking for stocks that are undervalued, buy them and hope that the price will rise in the future.
Short-selling allows you exactly that.
Short-selling refers to the practice of borrowing financial instruments from your broker and selling them at the current market price, with the anticipation of lower prices in the future. Once the prices fall, a trader would buy the same instruments on the market and return the borrowed instruments to the lender (typically the trader’s broker.)
The trader would make a profit equal to the difference of the selling price (when prices are higher) and the buying price (when prices are lower.)
Here’s a graphic that explains how short-selling work.
Step 1: Naked short seller (“naked” because he doesn’t own the shorted instrument) sells the borrowed instrument to the market (the “buyer”) at the current market price.
Step 2: The short seller buys from the market (in this case, the “seller”) at a lower market price and closes his short-position, making a profit on the difference between the selling and buying price.
Unlike beginners, professional traders don’t hesitate to short-sell a financial instrument. If the analysis is correct, a trader can make money both in bull markets and bear markets, which is the main advantage of short-selling.
However, bear in mind that short-selling doesn’t come without risks. When buying a financial instrument, there’s theoretically a limited risk associated with the trade. The price of an instrument can only fall to zero, but the upside potential is basically unlimited.
Short-selling is different. Since a trader is profiting from falling prices, there’s a limited profit potential as prices can only fall as low as zero. On the other hand, risks are theoretically unlimited as the price can skyrocket. This is the main reason why beginner traders hesitate to short in the financial markets.
What would you do?
Having strict risk management rules in place is a must when short-selling the market.
With the rising popularity of derivative trading and CFDs, a trader can nowadays short-sell on almost all financial markets. While we’ve focused on stocks in this introduction to explain the concept of short-selling, the same practice works on any other financial market.
Whether you’re trading stocks, currencies, commodities or stock indices, you can profit from falling prices on the markets.
How Do Forex Pairs Work?
There are eight major currencies on the Forex market which are heavily traded on a daily basis. Those are the US dollar, Canadian dollar, British pound, Swiss franc, euro, Japanese yen, Australian dollar and the New Zealand dollar.
However, to trade on the Forex market, traders are dealing with currency pairs and not with individual currencies, because the price of each currency is quoted in terms of a counter-currency.
The first currency in a currency pair is called the base currency and the second currency is called the counter-currency. A rising exchange rate signals any of the following scenarios:
Read those four points as many times as needed until you fully understand this concept. You need to know what is going on with the base and counter-currencies of a pair when short-selling on the Forex market.
Currency indices can do a great job in determining what currency is appreciating and what is depreciating. For example, take a look at the Dollar index (DXY), which shows the value of the US dollar relative to a basket of six major currencies which have the largest share in the US trade balance.
The following chart shows the US dollar index on the daily timeframe. A bullish candle shows that the US dollar was outperforming most other major currencies that day, while a bearish candle shows a relatively weak greenback.
Finally, currency pairs are usually traded in lots. One lot represents 100,000 units of the base currency. For example, if you short one lot of EUR/USD, you’re basically borrowing €100,000 and selling them at the current market price by funding the position in the counter-value of US dollars.
Can You Short on Forex?
Shorting on Forex is perfectly possible and many traders do it on a regular basis. Unlike on the stock market, risks associated with shorting on Forex are relatively limited because of the inter-relation of currencies in a currency pair.
For an exchange rate to go through the roof, there needs to be dramatic changes in the current market environment.
Similarly, the downside potential of an exchange rate is also limited. It’s an interplay of the value of both currencies that determines the current exchange rate.
Ugly ducklings can throw spanners in the works
However, Black Swan events (unexpected events with severe and long-lasting impact) do happen from time to time on the Forex market and are a nightmare for traders.
Think about the unexpected removal of the EUR/CHF peg by the Swiss National Bank in 2020. The value of the Swiss franc soared by 30% in a matter of minutes. This led to dramatic losses to many market participants who were short on the franc.
Another good example is the Brexit vote in 2020. Investors who were short on the EUR/GBP pair either finished the day with high losses or blew their account completely.
Rollovers and financing
When shorting on the Forex market, you also need to be aware of the rollover and financing costs which can decrease your potential profits.
Since you’re shorting the one currency and funding the position with the other currency of a currency pair, you’ll have to pay interest payments on the shorted currency. That said, you will earn interest payments on the funding currency.
If the interest rate of the shorted currency is higher than that of the funding currency, you’ll incur interest costs equal to the difference in interest rates. And if the interest rate of the shorted currency is lower than that of the funding currency, you’ll earn the difference in interest rates.
In addition, if you’re shorting on leverage, your broker will charge you financing costs depending on the amount you’ve borrowed. Financing costs usually depend on the current interbank rates plus your broker’s markup.
Watch: Is Leverage Your Friend or Foe?
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Best Currencies to Short
How to determine which currencies to short and which not to?
It depends on the analysis you’re using to find trades on the market.
As you already know, the best currencies to short are those which have the highest chance of losing value in the coming period.
Currency pairs that have formed reversal chart patterns on the daily chart during uptrends could be good candidates to short. Popular reversal chart patterns include:
You can also short currency pairs that have formed continuation chart patterns during downtrends, such as bearish wedges and triangle and rectangle breakouts to the downside.
Fibonacci levels also offer an excellent opportunity to enter into a short position if the price rejects an important Fib level, signalling that a downtrend is about to continue. Rejections of the 61.8% and 38.2% Fib levels are often used to enter into a short position during a downtrend.
Some traders like to use fundamental analysis to find good candidates for shorting.
Currencies that have a high chance of a rate cut (for example, because of weak economic growth, rising unemployment levels or weak inflation) are good to short-sell. Capital flows to currencies which have the highest interest rates, causing low-yielding currencies to depreciate and high-yielding currencies to appreciate.
Finally, political and economic turmoil, especially in emerging market countries, often cause a depreciation of the domestic currency.
Best and Worst Time to Short the Market
Despite being the largest, most liquid and most traded market in the world, there are times at which you should stand on the sidelines.
To explain the best and worst times to short the market, let’s quickly go through the main Forex trading sessions and their liquidity.
The Forex market is an over-the-counter market that trades during trading sessions, which are basically large financial centres where the majority of the daily Forex transactions take place. It’s no wonder that the largest world economies also have the largest share in the daily trading turnover.
The main four Forex trading sessions are:
Recently, Singapore and Hong Kong have also become big players in the currency market.
The New York session, also called the US session, is a heavily traded session during which major US economic reports are published. After the London session, the New York session is the most liquid of all Forex trading sessions with a high number of buyers and sellers available for all major currencies.
When the New York session is at its peak, it’s safe to short-sell a currency pair.
The London session is the largest European session and the most liquid trading session of all. The geographic location of London, being in between east and west, allows traders from both the US and Asia to trade during the London open market hours. The few hours during which the New York and the London sessions overlap represent the most-liquid and most-traded hours of all.
During these hours, it’s safe to scalp and short-sell at the same time.
Sydney and Tokyo
Finally, the Sydney and Tokyo sessions are major Asian sessions that trade when London and New York close. Asian currencies, such as the Japanese yen, Australian dollar, and New Zealand dollar are heavily traded during those sessions.
This makes it relatively safe to short those currencies against other majors.
Liquidity is your friend
As you’ve noticed, we mentioned the term “liquidity” several times. If you’re a day trader or scalper, you should only trade and short-sell during periods of high liquidity. Avoid short-selling during these times:
How to Close a Short Position?
After you’ve opened a short position, you’ll eventually want to close it to lock in profits or limit losses.
Remember what we’ve said in the introduction about short-selling. A short-seller borrows a currency, sells it at the current market price, waits for the price to fall and buys the currency later at a lower price in order to return the loan.
So, after you sell a currency, you’ll have to buy it to close a short position. This can be done either to lock in profits or to cut losses if the trade starts to go against you. If the currency starts to rise, you’ll still have to buy it in order to return the loan, only that in this case you’ll pay more than what you sold the currency for and incur a loss.
If your trade is in profit, the best time to close a short position is in times of high liquidity. This will ensure a tight spread and allow you to find a buyer close to the current market price.
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