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Futures Level 2


Agenda • • • • •

Who and what drives the Futures market? Why trade When to trade How to trade using orders intelligently Good trading habits


What drives the Futures market? •Weather •Relative values of currencies •News •Politics


Why trade? •Speculation –Taking advantage of volatility for profit

•Hedging –Covering exposure of physical harvest –Reducing corporate, foreign trade liabilities –Portfolio diversification - A fundamental element of risk management


When to trade: Speculation

Released on 9/12/07 For wk 9/7 2007 Crude oil inventories (weekly change)

Actual

-7.0 M barrels

Here we see how a negative number in the oil inventories caused the price of oil to move 2 dollars in only a few hours

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When to trade: Hedging A farmer growing wheat with a yearly production of 100,000 bushels has a commercial risk of falling wheat prices. Using futures contracts, he is able to hedge against this risk.

Strategy: In order to eliminate his commercial risk he sells futures contracts equal to the amount of wheat he has produced. Thus, he is selling 20 futures contracts. (5,000 Tons pr contract x 20 contract = 100,000 bushels) Result: •

If wheat prices increases he is making money on the wheat in his barn.

•

If wheat prices drops he is making money on his futures contracts.


When to trade continued… • •

Because futures contracts, by definition will eventually reach a value date, it is important to know when each contract expires. All this information is available via out online resource centre

First notice, online expiry and Expiry date are all shown for each contract


Trading made simple… Buy and sell at market

Costs: •Nominal value of trade •Initial margin •Maintenance margin

Market depth

Order window for entering or exiting the market


Using orders intelligently •

Order types – Limit – Market – Stop – Stop Limit – Trailing stop Orders can be placed in the – Trade modules – Order module – Account Summary

Entry/Exit orders


A 3-way order

Take profit order Entry/Buy Stop-loss order


Good trading habits • • • • • • •

Discipline! Set long-term goals Don’t overextend your finances and manage your margins Diversify, portfolio management Trade with your head, not with your heart Trade your plan: If you fail to plan, you plan to fail. Stick to your strategy. Plan the trade, trade the plan. Manage your positions and orders diligently


Thank you


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