Futures contracts in the UK are an agreement to buy or sell an asset at a predetermined price at a specified date in the future. Futures contracts are traded on exchanges and can be used for various assets, commodities, currencies, and indexes.
Regarding futures trading, UK traders must consider several factors to develop a successful strategy. The UK is home to several different exchanges, including the London International Financial Futures and Options Exchange (LIFFE) and the Chicago Mercantile Exchange (CME).
Considering the various contracts available on each exchange and the different expiration dates is crucial. It is also necessary to consider each contract’s margin requirements and tick sizes. In addition, it is essential to have a good understanding of fundamental and technical analysis to make informed decisions about which direction the market is likely to move.
Once all of these factors have been considered, developing a futures trading strategy that suits your individual needs and objectives is possible. If you are a novice futures trader, it is recommended that you seek professional advice before entering into any trades. You can find more info here.
How to develop a futures trading strategy?
Several factors need to be considered when developing a futures trading strategy. These include:
The type of contract
There are different types of futures contracts available on different exchanges. The London International Financial Futures and Options Exchange (LIFFE) offers interest rates, equity indexes, and commodities contracts. The Chicago Mercantile Exchange (CME) offers currency, interest rate, stock index, and commodity futures contracts. It is essential to consider the different types of contracts available and match them to your investment objectives.
The expiration date
Futures contracts have a specified expiration date on which the contract must be settled. The expiration date will determine how long you have to hold the position. For example, if you buy a December corn futures contract, you will need to sell or buy an equal amount of corn before the end of December to settle the contract.
When you trade futures, you must post a margin, a good faith deposit that acts as collateral for the trade. The margin requirements vary depending on the asset and the exchange on which it is traded. For example, the CME requires a margin of 3-15% for most stock index futures contracts.
The tick is the minimum price increment that can be traded. Tick sizes also vary depending on the asset and the exchange. For example, the CME uses a 0.01 tick size for currency futures and a 0.25 tick for stock index futures.
Fundamental analysis involves analysing economic indicators to predict future price movements. Fundamental analysis in the UK can be used to identify long-term trends as well as short-term opportunities.
This approach uses past price data to identify patterns indicating future price movements, and technical analysis can generate buy and sell signals and set target prices and stop-loss levels.
What are the drawbacks of using a futures trading strategy??
While futures trading can be profitable, there are also some risks involved. Since futures contracts are traded on margin, you can lose more money than you have invested.
Futures contracts are leveraged instruments, which means that a small move in the underlying asset can significantly impact your position, which can work in your favour if the market moves in the direction you expect. Still, it can also lead to losses if it moves against you.
Futures markets are often volatile, and prices can fluctuate rapidly, leading to profits or losses depending on the direction of the moving market. When you trade futures, you enter into a contract with another party. This counterparty may be unable to meet its obligations if the market moves against them.
Futures contracts can be challenging to sell if the market moves against your position and no buyers are willing to take on your contract.
The bottom line
When developing a futures trading strategy, it is essential to consider all of these factors to make informed decisions about which direction the market is likely to move. If you are a novice futures trader, it is recommended that you seek professional advice before entering into any trades.