When people imagine the classic trader, they think of a crowded trading floor where traders are using vocal and nonverbal hand signals to communicate (known as the ‘open outcry’ system).
However, while most trading pits have closed, futures trading remains a lucrative and popular avenue for traders. So, what do you need to know about global financial futures?
What are global financial futures?
Considered an alternative to stocks, global financial futures are derivative contracts where an agreement has been made to buy or sell a commodity or asset at a predetermined date and at a specific price. It is of benefit to companies looking to guarantee the cost of their underlying commodity and to investors who can cut enormous profits by trading futures contracts.
However, this method of trading is not for the faint-hearted. It is practiced by experienced and highly competent speculators who are looking to diversify their investments and dramatically increase their profits. They must understand futures markets and hone their mindset by mastering the ‘psychology of trading’. If you’re interested in a more advanced financial trading course Financial eLearning provides a Level 5 Diploma in Financial Trading that will help give you the training required here.
Why is understanding futures markets important?
Understanding futures markets is crucial. It is liquid and risky in nature as it comes with greater leverage than fixed, guaranteed stocks. Inevitably, the higher the leverage the greater the gain – but also the higher the potential loss.
While trading stocks also comes with risk, it is comparatively less risky than futures trading as the trader can buy and hold onto the stock for years until the appropriate time to sell. Futures, on the other hand, involves purchasing a financial contract with a set expiration date. It has been described as a ‘zero-sum game’ since investors win at the expense of another’s loss.
Spectators usually have to borrow substantial money to engage in the futures markets, too. Playing with such large sums and borrowing in itself is inherently risky. Consider if the market dramatically moves against you – you could end up losing all of the money that you borrowed in one day.
The good news is that trading courses are easily accessible online. Visit https://www.financialelearning.co.uk/product-category/financial-trading-courses/ to see an array of such trading courses. Through higher education, aspiring futures traders can learn all about the futures markets and the many trading strategies it involves. But even still, the trader must research, practice, and work consistently to build a professional portfolio, all of which cannot be done overnight.
What types of financial products are in the futures market?
While financial futures of the past were commonly associated with lifeblood commodities like crops, corn, coffee, and oil, futures contracts have evolved in line with the demands of the modern era. Now there are futures contracts in foreign indexes, cryptocurrencies, bonds, bitcoin, and more.
But that’s not to say that agricultural futures are not important. Grains futures (like wheat, soybeans, and rice), livestock futures (cattle and pigs), metal futures (gold, silver, copper), energy futures (oil and fuel), and soft futures (cotton, cocoa, sugar, coffee) are still all major players.
It is just as important to familiarise yourself with all the different categories of futures products and financial products in the market as it is to study the futures market itself.
Why is psychology important in Global Financial Futures?
Investors must also have a clear command of their own emotions. This is a skill that can be taught through learning the concept of trading psychology.
Human brains typically do not cope very well when emotions run high and when working under pressure. Cognitive biases have also been proven to lead to poor decision-making by even the most veteran traders. Ingrained biases like confirmation bias, information bias, the ‘bandwagon effect’, and neglect of probability can become a recipe for disaster for those trading in global financial futures. Some even argue the global financial crisis boiled down to biases, panic, and knee-jerk reactions.
While trading skills are important, the right mindset in trading is equally vital. Investors and traders must contain their emotions while also thinking quickly and exercising rationality and discipline. Understanding how to emotionally detach from your trading can feel alien, but it is crucial, to be honest with yourself when the market is working against you.
You have to learn how to fight your natural instincts, particularly ‘fear’ and ‘greed’ which are the two pinnacles in trading psychology. Accredited training courses teach you how to recognize where fear and greed have the potential to influence your decision and how to remove them entirely from your trading perspective.
Skill and experience
All-in-all, the success of trading in futures markets depends upon your experience and dedication. Short-term trading in this way requires devotion from traders to immerse themselves in the stock market in their daily lives. But although financial futures are risky, they can be enormously beneficial to those who can trade in them successfully.