Futures is a contract concluded for delivery of a certain commodity in future at a fixed price. A futures contract buyer assumes responsibility to buy a commodity within a particular timeframe. A futures contract seller takes obligation to sell the commodity within the specified time limits. Both obligations are related to a standard quantity of a certain commodity, they will be implemented at a certain time in future at a price fixed during the trade execution. That is to say, this operation must be implemented till the date set in advance - it is specified in the futures contract specification. The most wide spread commodities are those often used in everyday life.
Here they are:
The futures market is more liquid than the commodity one where futures are traded. Futures for these commodities are traded by thousands of traders daily. All them are trying to earn profit speculating on futures - buying commodities cheaper and selling at a higher price. The futures trading takes place on the futures stock exchange, the most famous commodity and futures stock markets are:
• NYMEX (New York Merchantile Exchange)
• CBOT (Chicago Board of Trade)
• CME (Chicago Mercantile Exchange)
• IPE (International Petroleum Exchange)
• LIFFE (London International Financial Futures Exchange)
• LME (London Metals Exchange)
The process of futures trading is similar to the process of trading on Forex. On the futures markets there are similar principles of technical and fundamental analysis, the same indicators and charts and also the way of setting orders. Moreover, firstly, all this system was worked out special for the futures trading, as it emerged much earlier than Forex market. But worth noticing that futures trading has several significant distinctions:
- A currency pair on Forex can be opened forever, i.e. once having bought pounds for dollars you can hold this position for a very long time - for months or even years. But it is different with futures. A futures contract has an expiration date. If you do not close position by yourself it will be closed involuntary at a closing price of the day and hour of futures contract maturity. You have to follow the validity period of a futures contract and switch to a later contract on time.
- The futures code consists of several parts. The first symbols in the designation point to a commodity type (gold, oil, cotton etc.), the next symbols show the month and year of futures delivery. For example, NGQ0 means gas futures (NG - Natural Gas), Q - August, 0 - 2010 year.
Here are the designations of months when futures are traded:
• January - F
• February - G
• March - H
• April - J
• May - K
• June - M
• July - N
• August - Q
• September - U
• October - V
• November - X
• December - Z
- The nearest expiration date of a futures contract is the most liquid. That means that the price for this asset is maximally close to the real one and there is a small possibility of sharp price surge.
- As it is known, Forex is a non-exchange market, the quotes are provided by a big number of banks and dealers. So you can trade at prices substantially different from prices of other brokers/dealers. It is impossible with futures.
- The futures trading is run only in the stock markets and only a certain buyer or seller determines the rates. Each quote has its price and volume - it has a certain buyer and seller. The stock exchanges submit quotes on their websites for the previous trading session (trading day) accurately to each tick.
- The size of futures contracts is strictly standardized by the stock exchange which sets the quantity and quality of a commodity specified in it. For example, 1 futures contract for pig bulks (PB) stipulates a delivery of 40000 pounds of certain sized pig bulks; Gold future (GC) stipulates a 100 ounce delivery of gold not less than 995 countermark; a crude oil futures contract stipulates a 1000 barrel delivery of crude oil meeting a specific quality requirement. Price quotes of futures contracts are globally universal.