The basics of futures trading in Australia
A contract to buy or sell an item at a specified price later is known as a futures contract. Futures trading is the practice of betting on the future prices of commodities, currencies, stocks, and other assets.
In Australia, futures trading is regulated by the Australian Securities and Investments Commission (ASIC). All traders must have an account with a licensed broker to trade futures.
Diving deeper into Futures
You can trade futures contracts on exchanges like the Chicago Mercantile Exchange (CME) and the Sydney Futures Exchange (SFE). The most popular contract types are index futures, currency futures and interest rate futures.
Index futures allow traders to speculate on the direction of a market benchmark index such as the ASX 200 or the Dow Jones Industrial Average.
Currency futures allow traders to speculate on the future value of a currency pair, such as the AUD/USD.
Futures on interest rates allow traders to bet on the future direction of interest rates.
How to trade futures
You must first open an account with a legitimate broker, like Saxo Bank to trade futures. You’ll be able to deposit and begin trading after that. Most brokers give out a demo account where you can play with virtual money before risking your own money.
If you’re new to futures trading, it’s essential to learn about the different types of contracts and how they work. The Saxo Bank website offers a variety of educational resources for beginners. The SFE also has an education centre that offers courses and webinars on futures trading.
The components of futures contracts
The underlying asset, expiration date, price, and leverage are the four essential elements of a futures contract.
The underlying asset is what gives the trade its “hard value.” Assets exist in a variety of forms, from traditional to experimental. Traditional futures contracts are used for trading agricultural goods, precious metals, foreign currencies, energy goods and interest rates. The most famous traders and market makers can be found in the upper ranks of The Wall Street Journal’s list. For example, there are several types of exotic futures contracts, such as region-specific snowfall, temperature indexes, hurricanes, and even box office earnings for a motion picture release.
The time allowed for trading a futures contract is dependent on the contract’s terms. The expiration date is the last day on which open trading of the contract may be conducted, and a final settlement value is established for each contract.
On the settlement day, cash accounts are valued using the final settlement rate as a basis for judgment, and purchasers of the actual physical asset (if there is one) can begin negotiations to take delivery.
The current worth of a futures contract is the amount of money required to buy or sell the underlying asset before it expires.
A futures contract’s price is based on the value of a certain quantity of the underlying asset, similar to what happens with forex currency pairings. For example, a WTI Crude Oil futures contract worth $100 is worth $1,000 for 1000 barrels of oil. In essence, the aggregate value of one WTI Crude Oil futures contract is 1,000 times the current market price per barrel. A change in the price of US$.01 per barrel represents pledged trading capital of US$10 when considering futures contracts are traded on margin.
The current value of the futures contract is set at the time of expiration based on its anticipated worth.
Leverage has both benefits and drawbacks. It can substantially enhance earnings while simultaneously increasing losses.
The use of leverage on the market is one of the most critical rules in futures trading. Futures contracts may be exchanged in various amounts known as “lots.” One contract is equivalent to one lot, and it is the smallest amount that may be bought or sold using futures contracts.
The maximum quantity of lots traded at any one time is determined by the trader’s brokerage firm, establishing margin requirements. There are two sorts of margin requirements: intraday and overnight.
- The amount of cash required to trade a futures contract if the position is closed at the session’s conclusion is known as an intraday margin requirement.
- The overnight margin is the capital reserves required in the trading account to maintain a position through the session close and into the next session’s open.
Margin requirements differ considerably based on the trading position, brokerage firm, client account size, and futures product being traded.