Buying Futures Contracts: An Overview
Purchasing futures contracts can be a hefty financial investment; it’s a serious business that necessitates leverage, attentive budgeting, and financing. However, “going long” in a futures market can yield significant profits if done skillfully.
In this blog, we’ll break down the process of buying futures contracts and how it could be a profitable strategy for trading the market.
What Is “Going Long” in Trading
A futures trader has two options in the market at any given moment: buying or selling a contract or multiple. Industry jargon states that you are “going long” in the market when you purchase a contract and “shorting” the market when you sell one. Each serves a very distinct purpose and has special strategic uses.
Going long is the most conventional strategy for chasing capital gains in the world of active trading. In this case, you purchase an asset with the expectation that its value will increase over time. As a result, having a “bullish bias” means expecting asset prices to rise in the near, medium, or long term.
Steps to Buy a Futures Contract
You can secure market share by purchasing stocks, futures contracts, cryptocurrencies, or other alluring assets to profit from a bullish bias. When purchasing a contract in the futures market, the following steps are taken:
Post a Margin: You have to post a per-contract margin when you start a fresh long position. For example, when purchasing one contract of CME gold, a $10,000 maintenance margin is required for overnight positions; short-term traders require a $5,500 intraday margin. Keep in mind that the balance in your trading account must always meet the margin requirements. Please note that Micro E-mini contracts offer a more affordable option for those with limited funds.
Unrealized P&L: Your applied leverage determines your tick-by-tick liability when you purchase a futures contract. Therefore, your trading account gets credited or debited $10.00 per tick movement when you purchase one lot of CME gold (GC). The account is credited $10.00 per tick if the price of GC increases, and it is deducted $10.00 per tick if the price decreases. Unrealized profit and loss (P&L) is the term for this.
Realized P&L: A trade is closed out at a profit or loss when a long position reaches its profit objective or stop loss. A profit is made if the price has increased since entering, but a loss is incurred if it has decreased below entry.
The fact that futures contracts are derivative products should not be overlooked. When you buy them, you need to have margin money, your trading account balance is affected tick by tick, and the use of leverage magnifies P&L.
Is Buying Futures a Good Investment?
Purchasing futures contracts can be done for a variety of strategic reasons, but these are the main ones:
Speculation: It would be wise to go long if you continue to have a bullish inclination toward an asset. When combined with a sound trading technique, “buying low and selling high” can be a very successful tactic.
Hedging: By purchasing specific futures contracts, you can reduce your exposure to risk. For example, buying commodities futures or foreign currency futures contracts can help you hedge against the effects of USD inflation. Additionally, purchasing “safe” assets like gold or the US 10-year note can lower systemic risk.
Portfolio Diversification: This allows investors to balance risk by gaining exposure to various asset classes without directly holding them. By buying futures in commodities, equities, or currencies, traders can protect themselves against market volatility and reduce dependence on traditional assets like stocks and bonds. This approach broadens the portfolio, potentially enhancing returns while safeguarding against sector-specific downturns.
