What You Ought To Know Before You Trade Forex, Futures and Options
The number of traders who are now trading futures and options has been growing very quickly for several years now. The comfort of accessing perpetually updated information on the internet has inspired an increased number day traders to endeavour to become successful and make excellent profits in this hazardous investment area.
Trading forex and commodity futures and options is definitely not for everybody.Nowdays it can be a complex and extremely high-risk business that undergoes very volatile price and value swings.
So before you decide to invest any money and commence trading in forex, commodities futures or option contracts, you should be aware of the hazards that are involved:
1. What level of trading experience and expertise do you possess?
2. Do you fully understand what commodity futures and option contracts are and how they work?
3. How do you handle your risk exposure and what steps will you take to protect your capital?
4. If you have a problem or question do you know where to get the answer?
I shall now endeavour to discuss the above questions in more detail.
What are Commodity futures and option contracts?
Simply put in a nutshell, a futures contract is a legally binding agreement between two parties to buy or sell a particular financial product or commodity in the future, on a designated exchange, for a specific quantity of a commodity at a specific price.
The buyer and seller of a futures contract will agree now on a price for a product to be delivered, or paid, for at a specifically set date and time in the future. This is is known as the “settlement date.” The actual delivery of the commodity can take place in fulfillment of the contract, but most futures contracts are invariably closed out or “offset” prior to delivery.
An option on a commodity futures contract is basically a legally binding agreement between two parties that gives the buyer, who pays a market determined price known as a “premium,” the right (but not the obligation), within a specific time period, to exercise his option.
The exercise of this option will result in the person being viewed as to have entered into a futures contract at a specified price. This is known as the “strike price.” In some cases, an option may confer the right to buy or sell the underlying asset directly, and these options are known as options on the physical asset.
There are two general categories of trading accounts that are most commonly used.
The first is a Individual Account. In an individual account all of trading that occurs is usually done for you. An individual account can be setup in either of two ways, that is a “non-discretionary” or a “discretionary” account.
All a “non-discretionary” account, means is that you are responsible for all of the trading decisions that occur. The stock broker will not carry out any trades without your prior approval being given.
On the other hand a “discretionary” individual account basically means that you have given full permission to the stock broker to make all trading decisions on your behalf.
You have the choice of opening an individual account either with a registered Futures Commission Merchant or through an Introducing Broker. The Introducing Broker can accept your orders and then will place them for completion with a Futures Commission Merchant usually who the Introducing Broker already has a working relationship with.
You can also deposit funds directly with the Futures Commission Merchant into an individual discretionary account. When you do this you grant power-of-attorney to a Futures Commission Merchant or an Introducing Broker to make all trading decisions on your behalf.
If by chance any problems do arise with your trading account it is a good idea always discuss these with your stock broker first. If the answers are not to your satisfaction then you can always go higher if need be. There are numerous avenues available such as ASIC or similar you can go to if the need should arise. I have found that if you have picked a reputable advisor/stock broker to begin with ,then they are only too willing to assist you when misunderstanding or problems occur
Here is a handy check list “Before You Begin Trading”:
Always make sure you have:
1. That you have clearly identified what your financial goals are, plus making sure you have included the actual amount of risk and loss you can handle comfortably?
2. You have decided exactly how much assistance and help you may require from a trading advisor or stock broker in making any trading decisions?
3. Prior to opening an account, you have checked the registration status and disciplinary history of the advisor/ stockbroker you have selected to open your account with..
4. Make sure that you have received and thoroughly went over the stock broker/advisor disclosure documents before you open an account?
5. Do you clearly understand the disclosure document, including the rate of fees, the possible potentials for loss,plus your right to withdraw your funds
If in any doubt whatsoever make sure you ask questions about anything that you do not fully understand. When all is said and done, remember it is ultmately your money, so make sure you know exactly where it is going and who is managing it..
I wish you profitable trading.