Forex for Beginners courses : Basic Training3
Part 3
Part 3
The Three Categories of “Players” in the Futures Game and their Roles
Producers
These individuals and/or firms actually produce or process the commodity that is being traded.
Whether it be silver, gold, petroleum, corn, live cattle, lumber, sugar or currencies, these are the people
who make the goods available either by mining them, harvesting them, raising them, growing them or
lending them.
They need to lock in costs. In other words, they have a product they want to sell at a determined price.
They may do this in order to guarantee a profit on an actual commodity they have on hand or have
produced, or they may want to lock in a price on an item in order to avoid losing more money on it if
it is already declining.
Finally, they may not have the goods at all. Rather they may be protecting themselves from a possible
side effect of declining or rising prices.
For example, a jewelry store with considerable gold and silver jewelry on hand may fear a decline in
the price of precious metals. They stand to lose money on their inventory as prices decline. Therefore,
they may choose to sell futures contracts of silver and/or gold in expectation of the decline. Thus, they
have profited from the futures sale.
End-Users
These are the people who will use the stuff that’s sold by producers. They need to lock in the cost of
their production by advance purchase of raw goods.
Therefore, they will buy either on the futures market or they may make a forward contract (previously
defined). At times, the end-user may become a seller as opposed to a buyer.
Assume, for example, that too much has been purchased or that the final product is not selling well. In
such an event, the end-user may switch to the sell side.
The producer may, at times, switch sides as well.
Assume the producer does not have enough production to meet obligations to others. The producer
may then become a buyer as opposed to a seller. As you can see, roles in futures trading can change.
Speculators
This is the largest group of futures traders. These people are sandwiched between the end-user and the
producer, providing a market buffer.
Perhaps no more than one to three percent of all futures contracts is actually completed by delivery.
The balance is closed out before any actual exchange of goods occurs.
Suffice it to say that speculators are often willing to take risks in markets at times and at prices that
may not be attractive to the other two groups.
Speculators do this in expectation of large percentage profit returns on price fluctuations.
The chart below shows the general relationship between the three basic groups of market participants.
More details will be given as your understanding of basic concepts increases.
For now, I’ll spare you specifics of how futures contracts work. These mechanical things will be
learned later. What I want you to learn now are the concepts of futures trading.
The basic issue is, of course, why trade?
Summary
The futures markets operate on very specific factors which, when, understood, can allow you to trade
profitably. To understand the markets, you must learn the underlying structure and functions of
commodity trading.
Why Traders Trade
At first glance, the answer to this question is obvious. The simple fact of the matter is that traders
trade, or participate in markets, in order to make profits. But there are many aspects to this simple
answer.
Let’s look at a few of the most significant reasons for trading futures:
1. Futures Trading Requires Relatively Small Start-Up Capital
Typically, one can get started in futures trading for as little as $10,000. In some cases
less capital is required. Many professionally managed trading pools require from $2,500
to $5,000 for participation. While most traders are not successful when starting with
limited capital, this is one way to get your foot in the door.
Futures options trading requires even less capital. Therefore, it is possible for
the individual to begin with an even smaller amount of capital. In. most other areas,
considerably greater capital is required.
The small amount of capital can work for or against you -- most often against you.
2. Leverage is Immense
The typical futures contract can be bought or sold for one to three percent of its total
value. For example, a 100-troy-ounce gold contract at $400 per ounce ($40,000 cash
value) can be bought for about $1,500-$2,000.
The balance of the money will, of course, be due if and when the contract is completed
(i.e., when you take delivery).
In the meantime, about $2,000 is controlling $40,000. In Treasury Bill futures, the
contract size is $1 million and the margin is about $2,500. In other words, you have
immense potential using small amounts of money.
This can work for or against you. It is the goal of the futures trader to make leverage
work in his or her favor.
3. Futures Markets Make Big Moves
Prices fluctuate dramatically almost every day. There is considerable opportunity to
win or lose daily in futures trading. Many markets will permit potential returns of
100% or more per day on the required margin money (i.e., money required to buy or
sell a contract).
This, too, can work for or against you. Where there is great opportunity, there is often
great risk as well.
4. Futures Markets are Very Liquid
By this I mean that it is possible to get into or out of a market very quickly. This is not
so with many stock and real estate investments. Some speculative stocks rarely trade,
and real estate is often hard to dispose of quickly.
With futures transactions, as with active stock transactions, one can enter and exit within
minutes, or even seconds. This makes the market ‘ideal’ for the speculator with limited
capital.
It is possible for the individual to begin with an even smaller amount of capital. In most
other areas considerably greater capital is required. The small amount of capital can
work for or against you -- most often against you.
5. There are not Many Secrets to Successful Trading
In some areas of investment, you need to know either the right people or the right inside
information. While correct inside information can be very helpful in trading futures,
success does not depend on such information. There are few secrets to successful
trading.
Good trading is a skill that can be learned and, in fact, be taught very specifically, objec-
tively and successfully to those willing and able to learn. Virtually any individual with
speculative capital, self-discipline and the motivation to succeed has an opportunity to
do so in the futures markets -- but it’s not easy.
6. There are Many Futures Vehicles
In addition to the traditional buy and sell short positions, there are many vehicles in
futures trading. These include options, spreads, option spreads, futures versus options
positions and combinations of the above.
Summary
The bottom line of all futures trading is to either make money or to keep from losing it. The futures
markets provide an excellent vehicle for doing this
Part 3 End
Producers
These individuals and/or firms actually produce or process the commodity that is being traded.
Whether it be silver, gold, petroleum, corn, live cattle, lumber, sugar or currencies, these are the people
who make the goods available either by mining them, harvesting them, raising them, growing them or
lending them.
They need to lock in costs. In other words, they have a product they want to sell at a determined price.
They may do this in order to guarantee a profit on an actual commodity they have on hand or have
produced, or they may want to lock in a price on an item in order to avoid losing more money on it if
it is already declining.
Finally, they may not have the goods at all. Rather they may be protecting themselves from a possible
side effect of declining or rising prices.
For example, a jewelry store with considerable gold and silver jewelry on hand may fear a decline in
the price of precious metals. They stand to lose money on their inventory as prices decline. Therefore,
they may choose to sell futures contracts of silver and/or gold in expectation of the decline. Thus, they
have profited from the futures sale.
End-Users
These are the people who will use the stuff that’s sold by producers. They need to lock in the cost of
their production by advance purchase of raw goods.
Therefore, they will buy either on the futures market or they may make a forward contract (previously
defined). At times, the end-user may become a seller as opposed to a buyer.
Assume, for example, that too much has been purchased or that the final product is not selling well. In
such an event, the end-user may switch to the sell side.
The producer may, at times, switch sides as well.
Assume the producer does not have enough production to meet obligations to others. The producer
may then become a buyer as opposed to a seller. As you can see, roles in futures trading can change.
Speculators
This is the largest group of futures traders. These people are sandwiched between the end-user and the
producer, providing a market buffer.
Perhaps no more than one to three percent of all futures contracts is actually completed by delivery.
The balance is closed out before any actual exchange of goods occurs.
Suffice it to say that speculators are often willing to take risks in markets at times and at prices that
may not be attractive to the other two groups.
Speculators do this in expectation of large percentage profit returns on price fluctuations.
The chart below shows the general relationship between the three basic groups of market participants.
More details will be given as your understanding of basic concepts increases.
For now, I’ll spare you specifics of how futures contracts work. These mechanical things will be
learned later. What I want you to learn now are the concepts of futures trading.
The basic issue is, of course, why trade?
Summary
The futures markets operate on very specific factors which, when, understood, can allow you to trade
profitably. To understand the markets, you must learn the underlying structure and functions of
commodity trading.
Why Traders Trade
At first glance, the answer to this question is obvious. The simple fact of the matter is that traders
trade, or participate in markets, in order to make profits. But there are many aspects to this simple
answer.
Let’s look at a few of the most significant reasons for trading futures:
1. Futures Trading Requires Relatively Small Start-Up Capital
Typically, one can get started in futures trading for as little as $10,000. In some cases
less capital is required. Many professionally managed trading pools require from $2,500
to $5,000 for participation. While most traders are not successful when starting with
limited capital, this is one way to get your foot in the door.
Futures options trading requires even less capital. Therefore, it is possible for
the individual to begin with an even smaller amount of capital. In. most other areas,
considerably greater capital is required.
The small amount of capital can work for or against you -- most often against you.
2. Leverage is Immense
The typical futures contract can be bought or sold for one to three percent of its total
value. For example, a 100-troy-ounce gold contract at $400 per ounce ($40,000 cash
value) can be bought for about $1,500-$2,000.
The balance of the money will, of course, be due if and when the contract is completed
(i.e., when you take delivery).
In the meantime, about $2,000 is controlling $40,000. In Treasury Bill futures, the
contract size is $1 million and the margin is about $2,500. In other words, you have
immense potential using small amounts of money.
This can work for or against you. It is the goal of the futures trader to make leverage
work in his or her favor.
3. Futures Markets Make Big Moves
Prices fluctuate dramatically almost every day. There is considerable opportunity to
win or lose daily in futures trading. Many markets will permit potential returns of
100% or more per day on the required margin money (i.e., money required to buy or
sell a contract).
This, too, can work for or against you. Where there is great opportunity, there is often
great risk as well.
4. Futures Markets are Very Liquid
By this I mean that it is possible to get into or out of a market very quickly. This is not
so with many stock and real estate investments. Some speculative stocks rarely trade,
and real estate is often hard to dispose of quickly.
With futures transactions, as with active stock transactions, one can enter and exit within
minutes, or even seconds. This makes the market ‘ideal’ for the speculator with limited
capital.
It is possible for the individual to begin with an even smaller amount of capital. In most
other areas considerably greater capital is required. The small amount of capital can
work for or against you -- most often against you.
5. There are not Many Secrets to Successful Trading
In some areas of investment, you need to know either the right people or the right inside
information. While correct inside information can be very helpful in trading futures,
success does not depend on such information. There are few secrets to successful
trading.
Good trading is a skill that can be learned and, in fact, be taught very specifically, objec-
tively and successfully to those willing and able to learn. Virtually any individual with
speculative capital, self-discipline and the motivation to succeed has an opportunity to
do so in the futures markets -- but it’s not easy.
6. There are Many Futures Vehicles
In addition to the traditional buy and sell short positions, there are many vehicles in
futures trading. These include options, spreads, option spreads, futures versus options
positions and combinations of the above.
Summary
The bottom line of all futures trading is to either make money or to keep from losing it. The futures
markets provide an excellent vehicle for doing this
Part 3 End
