In a highly digital world that is focused on developing and bringing innovation at every step, futures trading is a huge development. You all are familiar with forex trading, spot trading, and crypto trading, etc. Futures trading is also a phenomenon that you need to understand in the dimension of trading.

What is Futures Trading?

Futures trading is the buying and selling of contracts for a specific commodity or financial instrument at a predetermined price and delivery date in the future.

In simple words, futures trading means that you make an agreement with another party and decide the price and delivery date of the commodity and financial instrument in advance. Once the date of delivery arrives, you buy and sell your decided commodity at the decided price.

If the price of the commodity increases at the time of delivery, then one party makes a profit and another party suffers a loss.

Futures trading is used by a wide variety of market participants, including hedgers, speculators, and arbitrageurs, to manage the risk associated with price fluctuations of the underlying asset.

A Simple Example to Understand Futures Trading

A farmer grows corn and wants to sell it in three months when it is harvested. However, the farmer is concerned that the price of corn may drop between now and then. To hedge against this risk, the farmer can sell a futures contract for corn at a predetermined price on a futures exchange. This contract obligates the farmer to sell a certain amount of corn at a fixed price on a specific date in the future.

On the other hand, a cereal manufacturer is worried that the price of corn will rise, so they decide to buy a futures contract for corn. This contract obligates the manufacturer to buy a certain amount of corn at a fixed price on a specific date in the future.

When the delivery date arrives, the farmer will sell their corn to the cereal manufacturer at the predetermined price, regardless of the current market price. This allows both the farmer and the cereal manufacturer to lock in a price for the corn and manage their risk.

In this example, the farmer and the cereal manufacturer are the two parties of the futures contract, and the exchange acts as an intermediary to ensure that the contract is fulfilled according to the terms.

Learn More On Mastering the Art of Trading

What are Types of Futures Trading?

There are several types of futures trading, including:

1. Commodity Futures: These contracts involve the buying and selling of physical commodities such as agricultural products (e.g. corn, wheat, soybeans), precious metals (e.g. gold, silver), and energy products (e.g. crude oil, natural gas). 

2. Financial Futures: These contracts involve the buying and selling of financial instruments such as interest rates, stock indices, and foreign currencies.

3. Currency Futures: These contracts involve the buying and selling of foreign currencies. They are used to hedge against currency risk or to speculate on exchange rate movements.

4. Index Futures: These contracts are based on stock market indices, like the S&P 500, Nasdaq, etc. and provide a way for traders to gain exposure to the broader market without having to buy and sell individual stocks.

5. Options on Futures: These are contracts that give the holder the right, but not the obligation, to buy or sell a futures contract at a specific price on or before a specific date.

6. Cryptocurrency Futures: These contracts allow traders to speculate on the price of cryptocurrencies like Bitcoin and Ethereum, in the same way as traditional futures contracts.

Each type of futures contract has its own unique characteristics, and traders should be familiar with the underlying asset and the associated risks before trading.

What are Perpetual and Quarterly Futures Trading?

Perpetual Futures:

• These contracts don’t have a fixed expiration date, which means you can hold onto them for as long as you’d like.
• They’re designed to track the current market price closely. This is done through a funding mechanism that adjusts the contract’s price to match the real-time price of the asset it’s connected to. This helps keep things fair and prevents big differences between the contract price and the actual price.
• You’ll often hear them referred to as “perpetual swaps” or just “perpetuals.” They’re commonly used in markets involving cryptocurrencies like Bitcoin.
• They’re great if you want to keep your position open for a while and react to long-term trends in the market. However, they come with an extra cost known as funding fees, which can eat into your profits if you hold onto them for a long time.

Quarterly Futures:

• These contracts have specific expiration dates, usually occurring every three months. When that date comes, the contract is settled, and actions are taken based on the terms of the contract.
• Traders who hold quarterly futures have two main choices on the expiration date: they can either receive the actual asset they were trading (if they were buying) or deliver the asset (if they were selling), or they can close out their position before the expiration date by making an opposite trade to their original position.
• These contracts are well-suited for traders looking to capitalize on short-term price movements. They’re also helpful if you want to avoid the ongoing funding costs that come with perpetual futures, making them a good option if you prefer quicker trading.

In summary, perpetual futures give you flexibility to hold onto your position for the long haul, but you need to watch out for funding fees / Swap fee. Quarterly futures have set expiration dates, making them good for reacting quickly to short-term changes or avoiding extra costs. Your choice depends on your trading strategy and how long you want to hold your position.

Where Do You Trade Futures?

Futures contracts can be traded on a variety of futures exchanges around the world, such as:

1. The Chicago Mercantile Exchange (CME) in the United States: This is one of the largest and most well-known futures exchanges in the world, and it offers a wide range of commodity and financial futures and options.

2. The Intercontinental Exchange (ICE) in the United States: This exchange offers futures and options contracts for a variety of commodities, including energy, agricultural products, and financial instruments.

3. The Euronext exchange in Europe: This exchange offers futures and options contracts for a variety of commodities and financial instruments, and it operates in several European countries, including France, the Netherlands, and Portugal.

4. The Singapore Exchange (SGX) in Asia: This exchange offers a variety of commodity and financial futures and options, as well as cash-settled and physically-settled futures contracts.

5. The Tokyo Commodity Exchange (TOCOM) in Japan: This exchange offers a wide range of commodity futures, including precious metals, energy, and agricultural products.

6. The Hong Kong Exchange (HKEX) in Asia: This exchange offers a wide range of financial futures and options, including index futures and options, interest rate futures, and currency futures.

In addition to these traditional futures exchanges, there are also several online platforms that offer access to futures trading, such as cryptocurrency exchanges that offer cryptocurrency futures trading.

Conclusion

As we discussed, Futures trading refers to buying and selling commodities and other financial instruments at a predetermined price and date. The parties enter into futures contracts to carry out their deals.

The value in the market at the time of delivery does not affect the futures contract at any cost. Futures trading has many types and even involves foreign currencies and cryptocurrencies. Perpetual and Quarterly trading are also some of its types.

Also, there are numerous futures exchange platforms that people can use to make futures contracts for buying and selling financial commodities.