The Risks With Futures Trading

Commodities trading has always been feared by many self directed investors and stock traders. Once the risks are explained and understood few investors fear commodities as they once did. The risks with futures trading can be understood when one takes the time to learn the risk.

No matter what a trader or investor is interested in opening a position on they have to answer one key question, which way will the price move? In order to open a position a trader or investor needs to have an idea of where it is going. This means a move against any open position is the same risk dealt by all traders no matter what they are buying or selling.

Commodities can either move up or down in price as is the case with stocks for example. The commodity contract requires that the trader or investor make up his or her mind about where that price will be in the future. A position is then opened based on that traders belief of where that price will be in the future.

Typical commodity contract sizes are so large that few traders or investors could ever afford to open a position. In order to allow traders to open positions, these accounts are all margined. Margin allows the trader or investor to place a smaller amount down but still control the whole contract.

Since futures contracts have margin there is the belief that they are a more risky investment. In order to trade or invest in a commodities contract one would have to put up a lot of money. In order to get more traders and investors margin accounts were created to trade futures contracts.

There is another risk associated with commodities but this one is one that is a remote possibility. Delivery happens when a contract expires at the end of its month. So a crude November contract will expire the end of November, those holding open positions will be faced with delivery of 1000 barrels of crude. Almost all traders and investors close the contract before expiration so delivery is rarely if ever a problem for a trader or investor.

Delivery is often feared as a risk of owning a commodities contract. This is incorrect since well in advance of the expiration month you can close out the position or roll into the next contract with a different expiration month. Futures brokers also warn you to close a position before there is any risk of delivery.

The unfortunate truth is that few traders or investors bother to understand the risks with futures trading. Many times they listen to idol gossip about what the commodities market is really like instead of bothering to investigate. Margin garners the biggest fear and many falsely believe a lot of risk.

The field of futures trading has never been more convenient. When you are looking for automatic trading software be sure to select products from a respected business.