Futures
Futures are like financial agreement obligating buyer to purchase a stock/commodity or any other financial instrument at a set date and price. Futures contract has an expiry date which is last date of trading. Most of the times even before expiry trader need to cut their position to avoid expiry complications. Some futures contract may avail for physical delivery as well. Such as Gold, Silver, Coffee and other major commodities.
- Futures usually requires to deposit the margin money, which is like a security. If you are trading 1000$ total value’s contract then you may require to deposit 50$-100$ depends on exchange requirement and instrument’s price volatility.
- Margin money also fluctuates and exchange may decide to increase or decrease margin money.
- Exchange decides margin money based on volume/ price fluctuations and other internal aspects.
- Institution usually trade futures the most as they get to trade 10 or 20 times position while depositing only small amount of money.
- I prefer trading in spot gold instead futures due to expiry issue and price changing on every expiry which usually confuse traders.
- Futures contract gives an edge to traders as you may trade 10 times more than cash value. Suppose you deposit $1000 with your broker then its very good chance you would be able to trade with $10000, So you are limiting your loss to just $1000 but your profit is on $10000.
- It has a major drawback as retail investors tend to go overboard while trading with high leverage.
- Usually retail investors does not understand the power of this major financial instrument and burn themselves. While they see they will get profit of $10000 with their $1000 value they fail to see their loss would also be count from $10000.
Gold futures
Gold futures are one of the most trading instrument in the world. Gold fut requires less margin as major broker give good leverage. Leveraging in market could be very profitable or it could be extremely risky. Depends on clients’s risk appetite or their stop loss.
- Standard leverage is 1:5 which means if you deposit $1000 with your broker you can avail $5000 position in your account.
- Now days even reputed broker started giving 1:10 margin. It means now you can avail $10000 positions with your $1000. I always advice my gold subscribers or even other signals subscribers not to over leverage the account.
- Usually clients take heavy positions considering market is very good and prices are in their favor. But market takes U turn and they lose heavily due to their high leverage.
- Gold futures is also a very good instrument to hedge position.
- They tend to cover risk of gold price volatility while hedging their positions in future.
- Usually futures traders does not expect or require physical delivery. Hence playing safe with bigger contracts.
- Gold spot and Futures prices would be always different which could confuse while you are availing signals service. I have attached chart of future and spot gold.
- It could wipe out entire account when major event such as FOMC monetary policy or ECB monetary policy.
- It could even send investors into debt as sometime market moves wildly and stop loss can be jumped.
Above chart is gold december future (GCZ8) which closed at 1219.20$. Chart attached below is spot gold which closed 1211.17$. So there is always a difference in price which could be confusing sometime.
Investment
I strongly advice my clients not to invest in any futures contract. I always prefer cash while investing in market. Cash market gives extreme flexibility to investors as their risk is limited and we have limited leverage in cash.
- Cash gives edge over futures as you are not kicked out of market due to lower margin.
- Futures have an expiry date which is an extreme turn off, Expiry would increase or decrease your cost.
- Volatility near expiry is extreme which could scare retail investors.
- Changing margins every now and then. Margin could change virtually almost daily. Which could impact portfolio.
Conclusion
Futures are extremely useful instruments when it comes to institutional traders. Retail traders should not trade in this major financial instrument due to its every changing margin requirement. Over leveraging is another issue which could hamper gains and could result in ultimate wrap up of investor. I always recommend my clients to trade in spot commodities or stocks. Even in Indices trades such as Dow Jones i highly recommend spot levels in every single trade.
You may also like
Happy Trading
Regards