Futures investing
Commodities trading and investing has been around for over a thousand years. Futures, the tool for commodities investing, have been traced as far back as ancient Greece and Rome. In the 15th century, London, Brussels, and Amsterdam were major trading centers with a broad spectrum of commodities being traded. Modern futures investing, however, essentially began when the Illinois State Legislature created the Chicago Board of Trade (CBOT).
By 1865 the CBOT had adopted rules that standardized many of the specifics of a futures contract: delivery, margin, and terms of payments. As the futures market grew, so did the number of players involved in the market. The trading public started to switch from those who had an underlying interest in the traded commodity, to those who were just trying to profit from price swings. These "speculators" were willing to take on price risk in exchange for profits. The introduction and subsequent growth of speculators in the marketplace was the foundation for futures trading today.
The CBOT, Chicago Mercantile Exchange (CME), and New York Mercantile Exchange (NYMEX) are the epicenters for commodities futures trading in America. Each exchange has its own specialty for futures trading. The NYMEX specializes in energy and metals futures while the CME trades stock, financial, agricultural contracts. In many instances, there will be similar contracts traded on different exchanges.
There are two types of futures traders in the market: speculators and hedgers. Hedgers are simply those who use the futures markets to eliminate risk from fluctuating commodity prices. Speculators are in the futures market solely to make a profit. The majority of people associated with futures markets are speculators. An overwhelming majority of trading system are tailored to speculators.
The intended purpose of a trading system is to reduce the risk involved with futures investing. Futures are one of the most risky forms of trading instruments available. The large value of each contract and high leverage capabilities make for a dangerous combination to inexperienced and experienced traders alike.
Technical analysis is a fundamental aspect of a majority of trading systems. Technical analysis is simply the analysis of market prices for specific contracts. The basic theory behind technical analysis is that a trader can identify trends and possible changes in the market\'s direction by analysing the price and volume of a contract. Spreads are another popular component of trading systems. A spread is when one buys a near contract and sells the far contract. When choosing a trading strategy, it is important to focus on finding a strategy that matches an individuals risk tolerance, time frame, and experience.
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